Indian Journal of Economics and Business

Vol. 20 No. 2 (July-December, 2021)

Copyright@ Ashwin Anokha Publications & Distributions
http://www.ashwinanokha.com/IJEB.php

Trend Analysis of Balance of Payments in India

S. Suriaganth
Assistant Professor, Department of Economics, H.H. The Rajah’s College (Autonomous),
(Affiliated to Bharathidasan University), Pudukkottai, Tamil Nadu, India.

Dr. A. Mohamed Abdullah

Assistant Professor, Department of Economics, Periyar EVR College (Autonomous),
(Affiliated to Bharathidasan University), Trichy, Tamil Nadu, India.

Revised: 05th June 2021

Accepted: 29th August 2021
Published: 30th December 2021

Abstract: This paper tried to examine the trend pattern of the balance of payment during the pre and post
devaluation period and the impact of devaluation on the balance of payment. The result indicates substantial
improvement of balance of payments during the pre- to post-devaluation period.

Keywords: Balance of Payment, Current Account, Capital Account, Financial Account

Introduction

The Balance of Payment (BOP) is the tool used by countries for tracking all international monetary
transactions over a particular period. Currently, the BOP is calculated every quarter and calendar
year. To determine how much money is going in and out of a country, all trades conducted by both
the private and public sectors area counted for in the BOP. If a country has received money, this is
known as a credit, and, if a country has paid or given money, the transaction is counted as a debit.
Theoretically, the BOP should be zero, meaning that assets (credits) and liabilities (debts) should
balance. But this is rarely the case in practice and thus, the BOP will tell the observer whether a
country has a deficit or a surplus and from which part of the economy the discrepancies are
stemming. The BOP is divided into three main categories: the current account, the capital account
and the financial account. Within these three categories, there are sub-divisions each of which
accounts for a different type of international monetary transaction.

The Current Account

To mark the inflow and outflow of goods and services into a country, the current account is used.
Investment earnings, both public and private, are put into the current account. Credits and debits
on the trade of merchandise, which includes goods such as raw materials and manufactured goods
that are bought, sold or given away (possibly in the form of aid) are included in the current account.

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Services apply to tourism, transport, manufacturing, business service fees, and royalties from patents
and copyrights. Goods and services to get her make up a country’s balance of trade (BOT). The
BOT is usually the largest proportion of a country’s balance of payments as it accounts for total
imports and exports. If a country has a trade deficit balance, it imports more than it exports, and if
it has a trade surplus balance, it exports more than it imports. Receipts from income-generating
assets, such as stocks (in the form of dividends) are also stated in the current account. Unilateral
transactions are the last component of the current account. These are credits, mainly remittances
from workers’ salaries, which are sent back into the home country of a national working overseas, as
well as foreign aid obtained directly.

The Capital Account

The capital account is where all the transfers of foreign capital are registered. This refers to the
acquisition or disposal of non-financial assets (such as physical assets such as land) and non-
generated assets that are needed but not generated for production, such as those used for diamond
mining. The capital account is broken down into monetary flows resulting from the forgiveness of
debts, the transfer of goods and financial assets by migrants leaving or entering a country, the transfer
of ownership of fixed assets (e.g. assets used in the income-generating process of production), the
transfer of funds received for the sale or acquisition of fixed assets, taxes on gifts and inheritance, etc.

The Financial Account

Foreign monetary flows related to the company, real estate, bond and stock transactions are
documented in the financial account. Government assets such as foreign reserves, gold, special
drawing rights (SDRs) owned by the International Monetary Fund, private assets held abroad, and
foreign direct investment are also included. Private and official properties held by foreigners are also
reported in the financial account.

Review of Literature

Nayyar (1982) had provided a systematic analysis of India’s balance of payments since 1970 and
evaluated the policies adopted by the government. The author observed that the overall comfortable
position of India’s BOP in the 1970s (especially in the second half of the 1970s) did not last long. At
the end of the decade, there were serious BOP difficulties, in the form of a massive trade deficit in
1979-80 which increased further in 1980-81. The author concludes that the formulation of our
economic policies in general, and trade policies in particular were based on short term crisis
management, rather than long term planning. However, the policies adopted in the late 1970s of
import liberalization with stress on export promotion represented the beginning of a new long term
perspective about trade policies and industrialization.

Rangarajan (1990) has analysed the developments in India’s balance of payments in the 1970s and
1980s. He pointed out that India’s balance of payments remained comfortable in the
1970sdespitethefirstoil shockof1973-74.Theeconomywas able to adjust to the first oil shock in a
remarkably short time because of strong growth in exports especially to oil-exporting countries,
increase in world trade volume, large inward remittances from Indian workers in Middle-East,
increase in private transfers, and increase in foreign aid. At the beginning of the 1980s, due to the
second oil shock in 1979, the pressures on the BOP intensified. The author specifically remarks that

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 S. Suriaganth & Dr. A. Mohamed Abdullah

while the current account turned into a surplus within two years after the first oil shock, the current
account deficit increased substantially in the two years after the second oil shock. It was observed that
from 1985-86 to 1989-90, that is, during the Seventh Plan period, there was a continuous strain on
the BOP situation. The large current account deficit (CAD) was the result of (a) large trade deficits
and the reduction in the surpluses on the invisible account and (b) large repayments to IMF also
exerted pressures on the level of reserves. During this period, the CAD was mainly financed by costly
measures such as commercial borrowings leading to an increase in the average cost of borrowing and
a shortening of the maturity period.

Virmani (2001)paper focuses on the causes behind the crisis of 1990-91 and the impact of
economic reforms for the period 1990-91 to 2000-01. It was observed that though the BOP crisis
occurred in 1990-91, the prelude to the crisis was built up in the late eighties. The 1990-91 crises
were the result of a combination of external and domestic shocks. The external shocks were: break
up of Soviet Bloc, Iraq - Kuwait war, while domestic shocks were: political uncertainty and
undermining confidence in the Indian economy. The main causes identified behind the crisis of
1990-91 were: fiscal profligacy, the decline in invisible surplus, rising external debt and an
overvalued exchange rate. Although a series of reforms were undertaken to over come the BOP
crisis, the external sector reforms were the most successful ones. There forms were successful in
increasing India’s trade to GDP ratio, improving net terms of trade, reducing
thecurrentaccountdeficitandputtingitonasustainablepath.Besidesthis,therewas an increase in capital
flows in the form of FDI and FII, an increase in foreign exchange reserves, a reduction in external
debt, and an appreciation of REER. On the macroeconomic front, there was a reduction in fiscal
deficit and primary deficit. Finally, the author concludes that further reforms are necessary to
increase openness and strengthen the external sector and competitiveness of the Indian economy.

Holmes et al (2007) in their study have considered the sustainability of India’s current
account by covering the period from 1950 to 2003. According to them, a necessary condition for
current account sustainability is that exports and imports are co-integrated. By employing
parametric and non-parametric tests, they have identified two distinct regimes characterized by
whether or not imports and exports are co-integrated. The regime of non - co-integration runs until
the late 1990s and the second regime of co-integration is present after that. This latter regime
coincides with the liberalization of the Indian economy. They concluded that there is evidence in
favour of a sustainable current account that has emerged in the late 1990s.

Bose & Jha (2011) have examined the causal linkages between the government budget
deficit and the current account deficit for India, by considering quarterly data from 1998Q1 to
2011Q1. They have used interest rates and exchange rates as the interlinking variables. The
conventional hypothesis of causation running from the fiscal deficit to interest rates to exchange
rates and then to the external deficit is only partially borne out by their results, while evidence in
favour of reverse causation is very strong. Bringing at oil prices helps complete the chain of reverse
causation in the twin deficit hypothesis for India, as the direction of causation is unambiguously
seen to run from oil prices to the external deficit to the fiscal deficit. The two deficits were seen to
run in the opposite direction since the mid - 1990s when the government started to significantly
reduce its budget deficit by implementing FRBM Act 2003. The current account deficit, on the
other hand, had been trending lower since the mid - 1990s till 2004-05, when it was again driven

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 Trend Analysis of Balance of Payments in India

up by escalating global oil prices, as oil prices moved from theUS$29 per barrel to the US $ 124 per
barrel between Q2 of 2003-04 and Q2 of 2007-08.

Materials and Methods

This study is mainly based on secondary sources which have been collected from Hand-Book of
Statistics, RBI for the period 1970-71 to 2019-20. The basic methodology adopted in this study is the
trend analysis.
Findings and Analysis

Table 1 shows that a fluctuation in BOP occurred before the devaluation of the currency. The balance
of payments situation was acceptable in the 1970s. Owing to trade deficits, the balance of payments
was negatively affected in the 1980s. Graph 1 shows that the balance of payments deteriorated sharply
in 1990-91 because of domestic political developments that affected confidence in the Indian
economy abroad.

Graph1: Trend of India’s Balance of Payments during the Pre-Devaluation Period

An analysis of the balance of payments trend shows that there was a substantial increase on average over
the period. In 1991-92, it accounted for US dollars 2599 million to the US $58524 million in 2019-20.
In 1992-93, 1995-96, 2008-09, 2011-2012 and 2018-19, there was a deficit in this account (Graph 2).

Graph2: Trend of India’s Balance of Payments during the Post-Devaluation Period

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 S. Suriaganth & Dr. A. Mohamed Abdullah

The study of the current account position trend of the Indian balance of payments shows that,
during the pre-devaluation period, the deficit of this account increased significantly. It went from
290 million during 1978-79 to 9680 million during 1990-91 in absolute US dollar value. This is
primarily due to the continuous decrease of the invisible account surplus during this time (Graph
3).
Graph3: Trend of India’s Current Accounts during the Pre-Devaluation Period

During the post-devaluation period, the current account status of India's balance of payments
shows a growing pattern. The deficit of this account has risen from 1178 million in 1991-92 to
24656 million in 2019-20, in absolute terms. Graph 4 reveals that there was a current account
surplus in the years 2001-02, 2002-03 and 2003-04. It is the first time that the current account
surplus has existed for three consecutive years in the post-independent era.

Graph4: Trend of India’s Current Accounts during the Post-Devaluation Period

Graph 5 shows that the capital surplus has raised significantly. An upward movement during the
time is shown by the overall trend of the account. The capital account rose from US $580 million

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 Trend Analysis of Balance of Payments in India

in 1970-71 to the US $7188 million in 1990-1991. In contrast to the capital account growth rate of
the balance of payments during the pre-evaluation period, the growth rate of the current account
was high.
Graph5:Trend of India’s Capital Accounts during the Pre-Devaluation Period

Graph 6 shows that there was a substantial increase on average during the time. The capital
account has risen from the US $ 3777 million in 1990-91 to the US $ 83180 million in 2019-20,it
can be noted. From the above graph, it can be observed that capital account inflows declined
sharply in 2008-2009 due to the withdrawal of resources by recessionary foreign institutions.

Graph6:Trend of India’s Capital Accounts during the Post-Devaluation Period

An overview of the balance of payment deficits in the pre-and post-devaluation periods indicates a
rise from US$ 68.95 million in the pre-devaluation period to US$ 16819 million in the post-
devaluation period. Furthermore, the study of the current account reveals that, on average, the
account reveals an improvement in nominal terms from the pre-devaluation period to the post-
devaluation period. In the post-devaluation period, it accounted for almost US$ - 19149 million
as opposed to US$ -2576.52 million in the pre-devaluation period. The case of capital accounts

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was no different in that situation.

Graph7: Trend of India’s Current Accounts, Capital Accounts and Balance of Payment during
the Pre-Devaluation Period

Graph8:Trend of India’s Current Accounts, Capital Accounts and Balance of Payment during
the Post-Devaluation Period

Conclusion

During 1970-71 to 2019-20, this research attempted to investigate the impact of devaluation on
the balance of payment in India. The trend pattern of different components of the payment
balance, such as current account and capital account was also analyzed. The research draws the
following inferences from the study of patterns.

The change of the balance of payments from the pre-devaluation period to the post-devaluation
period has been verified by the mean balance of payments measure. During the post-devaluation
period 1991-92 to 2014-15, it accounts for an average of US$ 14473.71 million compared to US$
68.95 million during the pre-devaluation period 1970-71 to 1990-91 This increase in the balance
of payments of the pre-devaluation and post-devaluation periods is important at the5 per cent level
of significance.

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 Trend Analysis of Balance of Payments in India

The current account mean test indicated that the current account had changed from the pre-
devaluation period to the post-devaluation period. It accounts for an average of US$ -16216.8
million during the 1991-92 to 2011-12 post-devaluation period, compared to US$ -2576.52 million
during the 1970-71 to 1990-91 pre-devaluation period.

The capital account had changed from the pre-devaluation period to the post-devaluation period.
During the post-devaluation period from 1991-92 to 2011-12, this represents an average of US$
30690.67 million compared to US$ 2507.57 million during the pre-devaluation period from 1970-
71 to 1990-91.

Table1:Trend of India’s Current Account, Capital Account, and BOP Pre -Devaluation Period
Year Current Accounts Capital Accounts Balance of Payments
1971-72 -669 697 28
1972-73 -403 360 -43
1973-74 1444 -1416 28
1974-75 -1198 600 -599
1975-76 -206 913 707
1976-77 1001 905 1905
1977-78 1313 828 2141
1978-79 -290 1597 1308
1979-80 -685 1090 405
1980-81 -2804 1665 -1140
1981-82 -3179 657 -2523
1982-83 -3407 2087 -1319
1983-84 -3216 2655 -561
1984-85 -2417 3147 730
1985-86 -4867 4506 -361
1986-87 -4560 4512 -47
1987-88 -4852 5047 195
1988-89 -7997 8064 68
1989-90 -6841 6977 136
1990-91 -9680 7188 -2492
Average
1970-71to -2576.52 2507.57 -68.95
1990-91
Source: Handbook of Statistics on Indian Economy2014-15,Reserve Bank of India

Table2:Trend of India's Current Account, Capital Account, and BOP Post -Devaluation Period
Year Current Accounts Capital Accounts Balance of Payments
1991-92 -1178 3777 2599
1992-93 -3526 2936 -590
1993-94 -1159 9694 8535
1994-95 -3369 9156 5787
1995-96 -5912 4690 -1222

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1996-97 -4619 11412 6793

1997-98 -5499 10010 4511
1998-99 -4038 8260 4222
1999-00 -4698 11100 6402
2000-01 -2666 8535 5869
2001-02 3400 8357 11757
2002-03 6345 10640 16985
2003-04 14083 17338 31421
2004-05 -2470 28629 26159
2005-06 -9902 24954 15052
2006-07 -9565 46171 36606
2007-08 -15737 107901 92164
2008-09 -27915 7835 -20080
2009-10 -38180 51622 13442
2010-11 -45945 58996 13051
2011-12 -78155 65324 -12831
2012-13 -88163 91989 3826
2013-14 -32397 47906 15509
2014-15 -26859 89286 62427
2015-16 -22151 41128 18977
2016-17 -14417 36447 22030
2017-18 -48717 91390 42673
2018-19 -57256 54403 -2853
2019-20 -24656 83180 58524
Average
1991-92 -19149 35968 16819
to2019-20
Source: Handbook of Statistics on Indian Economy2019-20,ReserveBank of India

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