As revealed by India’s Ministry of Commerce and Industry, the country’s Balance of Payments (BoP) in 2020-21 is projected to be strong. This development has been attributed to a significant increase in exports and a decrease in imports. As of July 2020, India’s exports stand at approximately 91% of July 2019’s levels, while imports are hovering around 70-71% compared to July of the previous year.
Trade Surplus in June 2020
India’s trade balance turned positive for the first time in 18 years in June 2020. The dramatic drop in imports by 47.59% compared to June 2019 resulted in a trade surplus of USD 0.79 billion in June 2020. This shift in trade balance indicates an essential change in the country’s economic landscape.
Boosting Domestic Manufacturing
The Indian government is strategically taking steps to support and enhance domestic manufacturing and industry. Import restrictions on specific products and components, especially from China, have been increased as part of the ‘Atmanirbhar’ Initiative. Free-Trade Agreements (FTA) entered between 2009 and 2011 were reviewed, and most were found to be asymmetrical, favoring foreign goods over Indian ones.
Transition in Manufacturing Approach
The government also encouraged firms to move away from the traditional “assembly workshop” approach that epitomizes Indian manufacturing. Instead, they are being urged to adopt more innovative and contemporary manufacturing methods.
Understanding Balance of Payment
Balance of Payment (BoP) refers to a systematic record of all economic transactions between a nation and the rest of the world over a specific period, typically a year. It denotes whether a country has a trade surplus (exports exceed imports) or a trade deficit (imports exceed exports).
Functions of the BoP
The BoP provides insight into a country’s financial and economic status and can be used as an indicator of currency value appreciation or depreciation. It assists the government in decision-making regarding fiscal and trade policies by providing essential information about the country’s international economic transactions.
Components of the BoP
For compiling BoP accounts, a country’s economic transactions with the rest of the world are categorized under – Current account, Capital account, and Errors and Omissions. The BoP also records alterations in Foreign Exchange Reserves.
Current Account and Capital Account Explained
The Current Account reflects exports and imports of visibles (merchandise or goods) and invisibles (services, transfers, and income). The Capital Account, on the other hand, documents a country’s capital expenditure and income, summarizing the net flow of both private and public investment into an economy.
Understanding Errors and Omissions
Sometimes, the balance of payment does not reconcile. This discrepancy is represented in the BoP as Errors and Omissions, highlighting a country’s inability to accurately record all international transactions.
Changes in Foreign Exchange Reserves
Movements in reserves encompass changes in foreign currency assets held by the Reserve Bank of India (RBI) and shifts in Special Drawing Rights (SDR) balances. The BoP account can either display a surplus or a deficit. A deficit can be offset by drawing funds from the Foreign Exchange (Forex) Account. A scenario where the reserves in the forex account are insufficient is referred to as a BoP crisis.