10.9.1 Balance of Payments (BoP) statistics systematically summarise, for a specific period, the economic transactions of an economy with the rest of the world. The compilation and dissemination of BoP data is the prime responsibility of RBI. In India, the compilation of BoP statistics is broadly consistent with the guidelines contained in the BoP Manual, 5th Edition, of the International Monetary Fund (BPM5). The format of the presentation of the BoP data for the period since 1990-91 is based on the recommendations of the High-Level Committee on Balance of Payments, 1993 (Chairman: Dr. C. Rangarajan).
10.9.2 While the basic format follows the recommendations of the Rangarajan Committee, several committees and groups have been periodically appointed to refine the data and to ensure timeliness of data dissemination namely, the Technical Group on Reconciling Balance of Payments and DGCI&S data on Merchandise Trade, 1995; the Sub-group on Reporting of Foreign Exchange Transactions, 1997; the Sub-group on Surveys for Balance of Payments Data, 1998, the Study Group on Merchandise Trade Data, 2000; and the Technical Group on Statistics of International Trade in Services, 2000.
10.9.3 The BoP can be broadly divided into two accounts namely, (a) current account, and (b) capital and financial account. The current account measures the transfer of real resources (goods, services, income and transfers) between an economy and the rest of the world. The capital and financial account reflects the net changes in financial claims on the rest of the world. The current account is further subdivided into merchandise account and invisibles account. The merchandise account consists of transactions relating to exports and imports of goods. In the invisible account, there are three broad categories namely, (a) non-factor services such as travel, transportation, insurance and miscellaneous services; (b) transfers which do not involve any value in exchange, and (c) income which includes compensation of employees and investment income. The capital account can be broadly broken up into two categories namely, (a) non-debt flows such as direct and portfolio investments, and (b) debt flows such as external assistance, commercial borrowings, non-resident deposits, etc. The sum of the current account and capital account indicates the overall balance, which could either be in surplus or in deficit. The movement in overall balance is reflected in changes in the international reserves of the country.
10.9.4 Under the current account, transactions in goods, services and income are covered. The data on merchandise trade are available from two sources namely, (a) from the Directorate General of Commercial Intelligence and Statistics (DGCI&S) on customs basis, and (b) from RBI on payments (which includes both receipts and payments) basis. The Daily Trade Return (DTR) is the primary source of recording exports data at DGCI&S, while RBI relies mainly on the R-return furnished by Authorised Dealers (ADs) to compile the exports and imports data. The data on merchandise exports in BoP are compiled on the basis of information available from the DGCI&S, after adjusting for time and exchange rate differences. The merchandise export data is recorded on free on board (f.o.b.) basis. It may be noted that export of software in physical form is captured by DGCI&S.
10.9.5 The customs record data on imports on the basis of the Bill of Entry prepared for goods entering in the customs area. The data on imports under BoP statistics are compiled mainly on the basis of returns submitted by ADs supplemented by information on the transactions not passing through the banking channel such as imports financed through credit taken abroad. Imports under the BoP data are recorded on the basis of date of payment or date of disbursal of loans, which may differ significantly from the recording of imports at the Customs end on the basis of actual arrival of goods.
10.9.6 Transactions in services under BoP consist of travel, transportation, insurance, Government not included elsewhere, and ‘miscellaneous’ services. The data on travel receipts are calculated on the basis of the number of tourist arrivals in India and Survey of Tourists Expenditure provided by the Ministry of Tourism, Government of India. Since the expenditure patterns of tourists from different regions differ, it would be desirable to conduct surveys on per capita tourists expenditure by broad regions. Data on services are covered on a gross basis with a few exceptions such as receipts of Indian shipping and airline companies operating abroad. Under income, two types of transactions are recorded namely, compensation of employees and investment income. Investment income covers receipts and payments of dividends and profits on foreign investment, and receipts and payments of interest and other income.
10.9.7 Software exports have emerged as one of the most important items of services exports. The software exports are classified broadly into two types namely, on-site services and off-site services. On-site development refers to the work being done at the client’s site, while off-site exports could be in physical form (software prepared on magnetic tapes and paper media) as well as in non-physical form. Software exports in non-physical form, in turn, relates to the direct transmission abroad through dedicated earth stations and satellite links, which get captured in the ‘SOFTEX Forms’ prescribed for the purpose by the Reserve Bank. Software exports in the physical form are captured by the trade data compiled by the DGCI&S and are reported under merchandise exports in the BoP data, as per the international practice. Software exports in non-physical form are recorded under ‘miscellaneous’ services as a part of non-factor services. Since the reporting mechanism at RBI captures software earnings to the extent remitted to India, the National Association of Software and Service Companies (NASSCOM) has devised a format in consultation with the RBI for collection of information on software exports, which are used as a benchmark for gross earnings.
10.9.8 Under the capital account, both equity and debt flows are covered. Debt flows comprise commercial borrowings, external assistance, short-term trade credits and Non-Resident Indian (NRI) deposits, while the equity flows comprise Foreign Direct Investment (FDI) and portfolio investment. The BPM5 defines FDI as international investment with a lasting interest in an enterprise with the investor having at least 10 per cent equity holding. However, BPM5 allows for flexibilities from the 10 per cent criterion depending on presence of effective voice of the non-resident investors in the management of the firm. At present, direct investment into the country by non-residents is freely allowed in most sectors subject to certain sectoral ceilings on equity holdings. The FDI within the prescribed sectoral ceilings is freely allowed under RBI automatic route. FDI in restricted activities and in excess of the prescribed sectoral ceilings requires prior Government approval through the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Promotion Board (FIPB). The non-resident FDI investors are also allowed to raise their stakes through acquisition of shares. The portfolio investment consists of the amount raised by Indian corporates through Global Depositary Receipts (GDRs) or American Depositary Receipts (ADRs), investments in Indian stock markets by foreign institutional investors (FIIs) and high net worth individuals and offshore funds.
10.9.9 The relevant data for the compilation of BoP are collected by RBI from various sources including the R-returns and other details submitted by the authorised dealers, exchange control records and various surveys. Quarterly data in detail on BoP, in US dollar and in Indian rupees, are disseminated by the end of the next quarter on RBI website and in RBI Bulletin. India is a signatory to the Special Data Dissemination Standards (SDDS) of the IMF and as such India meets the requirement of timeliness. The trade data released by DGCI&S with a lag of about a month are also released in the RBI Bulletin. RBI publishes important time series data on foreign trade and BoP in the Handbook of Statistics on Indian Economy.
10.9.10 With the replacement of the Foreign Exchange Regulation Act (1973) by the Foreign Exchange Management Act (1999) coupled with a policy of deregulation and liberalisation, the information system on BoP transactions will have to rely increasingly on aggregate positions reported by ADs and for disaggregated data on periodical or ad hoc surveys. Even in the case of merchandise trade as the rules governing surrender of foreign exchange by exporters get liberalised, it would be increasingly difficult to get statistics pertaining to merchandise trade on payments basis from ADs. In such a scenario, the trade data in BoP would have to be compiled exclusively on the basis of information available on customs records, as is the practice in a number of industrialised countries. Similarly, further liberalisation of capital account transactions may necessitate the use of surveys even for aggregate data.
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10.9.11 BoP data are compiled as per the international best practices, though certain aspects of data compilation and dissemination may require further refinements. During the late eighties and early nineties, the exports figures compiled by DGCI&S and RBI showed wide differences. A Technical Group (Chairman: Shri O.P. Sodhani) was constituted to find the proximate causes for the differences in trade data and to recommend suitable measures. The important causes identified for the differences in export statistics were: (i) two different source documents used by the two agencies, (ii) under-reporting of ‘short shipment’ or ‘shut out’ cases by the customs to RBI, (iii) certain types of goods not being captured by DGCI&S data but included in the payments data, and (iv) valuation and timing differences. The main recommendations of the Sodhani Technical Group were as follows: (i) the Daily Trade Return (DTR) should be the common basis for both agencies, (ii) DTR data should be transmitted to RBI and DGCI&S in a centralised manner, and (iii) DTR transactions matched with Export Negotiated Contract (ENC) data should form the basis for compilation of export data by RBI. In this connection it may be indicated that the Electronic Data Interchange (EDI) system has been implemented by the Customs at 24 major ports and DTR data are being received both by RBI and DGCI&S. Notwithstanding the implementation of some of the recommendations of the Sodhani Technical Group, the difference in exports figures compiled by DGCI&S and RBI has widened from US $ 1.6 billion in 1996-97 to US $ 3.0 billion in 1998-99 (see Table 10.2). There is, therefore, a need to identify and narrow down the differences.
RBI data on exports have been adjusted for timing and exchange rate difference, freight & insurance element and software service exports routed through SOFTEX forms (available since 1996-97).
Imports data have been adjusted for baggage gold & silver since 1992-93 as such data are not covered under DGCI&S.
Data for the period since 1996-97 are not strictly comparable with those for the earlier period due to changes in coverage.
10.9.12 On the basis of further examination of the persistence of difference in exports data, a Study Group (Convenor: Shri M. R. Nair) recommended the following steps: (a) The DGCI&S in consultation with the Customs should ensure complete coverage of exports data including those from minor ports and for all commodities including petroleum, oil and lubricants; (b) Large discrepancies in the matching of DTR and ENC data may be notified to the Customs authorities by RBI with a view to improving the quality of data reporting by the EDI system; (c) Transactions where the DTR value exceeds the ENC value need to be followed up with Customs and the Regional Offices of RBI so as to identify the nature of the discrepancies; and (d) RBI should undertake periodic studies to identify the sources of discrepancies between ENC data and R-return data at important AD branch levels. The Study Group, however, felt that some differences between the two sets of data would continue on account of valuation, as it may not be feasible to devise a uniform method of valuation due to practical difficulties.
10.9.13 The Sodhani Technical Group had identified coverage (such as import of defence items, aircrafts, ships and oil rigs), valuation and timing differences as the proximate causes of differences between imports data disseminated by DGCI&S and RBI. The extent of divergence in imports data had moderated from US $ 7.0 billion in 1996-97 to US $ 5.0 billion in 1998-99 which, however, widened to US $ 8.0 billion in 1999-2000 (see Table 10.2). On further examination of discrepancies in data, the Nair Study Group recommended the following corrective steps: (a) the DGCI&S should take steps to improve the coverage of data in consultation with the Customs for various items of data omitted, as also imports through various minor ports, (b) as there may be an element of overestimation of imports on payments basis in absence of documentary evidence on arrival of goods, the RBI may closely monitor and analyse the quantum of default on this count, and (c) RBI needs to conduct surveys to assess the likely size of bank charges and interest element included in imports on payments basis.
10.9.14 Furthermore, exports of goods are not recorded on the change of ownership basis while import data are not compiled on the f.o.b basis. The possibilities of conducting surveys to collect information on freight and insurance components from DTR data need to be explored by RBI. This would in due course facilitate compilation of imports data on f.o.b. basis.
10.9.15 The data on travel receipts are not available with required details. Similarly, the gross earnings of foreign shipping and airline companies operating in India, and of Indian shipping and airline companies operating abroad are not available. The data on profit and dividends on account of direct and portfolio investment are also not available separately. Further, the classification of direct investment income into income on equity due to dividends and distributed branch profits and reinvested earnings and undistributed branch profits and income on debt (interest) is required. Similarly, under portfolio investment income, the income on equity (i.e. dividends) and debt (i.e. interest) need to be shown separately. Data on retained earnings on Indian investment abroad are also not covered at the preliminary stage due to non-availability of such data.
10.9.16 In the case of capital account, information regarding the dilution of equity holding by non-residents in India and disinvestments abroad by residents is not fully available and, therefore, not completely captured in BoP. Data on portfolio investment are not covered fully due to non-availability of information such as that on portfolio investment by NRIs. Suppliers’ credit up to 180 days maturity is not included under ‘other investment’ as such data are not available.
10.9.17 As regards current and capital transactions relating to NRIs, there is some degree of overlap. For example, all private remittances from non-residents are assumed to have emanated from NRIs because no distinction is made between NRIs and other non-residents in the current account. Similarly, local withdrawals and redemptions of non-resident deposits are treated as part of private transfers with a contra entry in the relevant NRI deposit account. As a part of liberalisation as the policy regime tends to be less discriminative between NRIs and other non-residents, NRI transactions are increasingly being routed through the normal channels. For example, in the case of Foreign Direct Investment (FDI) into India, the treatment of NRIs is now similar to that of other non-residents with a few exceptions. Hence, the time-series data pertaining to NRIs need to be interpreted with caution.
10.9.18 As regards the legal provisions currently governing the data on BoP, RBI in exercise of the powers conferred by Sections 6 and 11 of the Foreign Exchange Management Act, 1999, (FEMA, 1999) may direct any authorised person to furnish such information, in such manner as it deems fit. Section 6 of the FEMA addresses the capital account transactions, and Section 11 of the Act empowers RBI to issue directions to authorised persons. Contravention of any direction of RBI by any authorised person or failure of any authorised person to file any return as directed by RBI will attract penal action.
Conclusions and Recommendations
10.9.19 The compilation and dissemination of BoP statistics is the prime responsibility of RBI. Keeping in view the importance of BoP statistics, several committees in the past had focused on various aspects of data reporting. The implementation of the recommendations of these committees has vastly improved the scope, coverage and timeliness of BoP data. The merchandise trade data with monthly frequency are available from DGCI&S with a lag of a month. The BoP data now largely conform to international standards. The quarterly BoP data are now available with time a lag of a quarter, which also meets the standards of SDDS of the IMF. However, certain discrepancies in data have persisted and certain new areas have emerged which need further attention. For example, the discrepancies in merchandise trade data both exports and imports, between DGCI&S and RBI have persisted. There is a need for more detailed data on trade in services, which has emerged as an important component of balance of payments. The issues arising out of changes in mode of transactions brought about by technology such as e-commerce need to be studied. The Commission notes that there are at present a number of committees and groups focusing on some of these issues. As an overall assessment, the Commission feels that there is scope for further refinements in some of the BoP data components and there is a need for further strengthening the data reporting mechanism.
10.9.20 The Commission therefore recommends that:
The implementation of recommendations made in the Reports of various committees and groups already constituted to closely examine different aspects of Balance of Payments (BoP) data needs to be expedited with a view to further refining items of the BoP statistics. In fact, there should be a continuous review of the methods of collecting data with regard to BoP on account of the anticipated developments in liberalisation of external sector transactions on both the current and capital accounts. In particular, this would be necessitated by any further review of repatriation and surrender requirements in the current account and liberalisation of the capital account.
Steps should be taken to identify and narrow down the differences in merchandise trade data as compiled by the Directorate General of Commercial Intelligence and Statistics (DGCI&S) and those reported on payments basis by RBI.
The coverage of Electronic Data Interchange (EDI) system should be enlarged to more ports and different types of shipping bills so as to facilitate a matching of exports data on the basis of Daily Trade Return (DTR) and those on the basis of exports negotiated contract (ENC). This would result not only in the narrowing down of differences in exports data between DGCI&S and RBI but would also facilitate recording of exports data on the basis of ENC statements reflecting change of ownership.
The coverage of DGCI&S data on imports should be enhanced to include defence items, aircraft, oilrigs, etc. This would help in narrowing down the differences between DGCI&S and RBI data.
The import data should be compiled on free on board (f.o.b.) basis. RBI should examine the possibilities of conducting surveys to collect information on freight and insurance components from DTR data, which in due course would facilitate compilation of imports on f.o.b. basis.
The purpose codes prescribed for reporting of foreign exchange transactions by Authorised Dealers (ADs) to RBI should be enlarged to capture more disaggregated data on international trade in services. Further, the mechanism of data reporting by the ADs should be supplemented by surveys on important areas of services.
The tourist arrival figures as compiled by the Ministry of Tourism are used by RBI for estimating travel receipts. In order to improve the quality of these estimates, the Ministry of Tourism should conduct surveys on the expenditure pattern of tourists drawn from different broad regions of the world on a regular basis.
Although RBI collects data on software exports through Software Exports (SOFTEX) forms, it uses NASSCOM data as a controlling total for gross receipts from software exports. There is, however, a need to re-examine the current methodology on collection of software export data. RBI, therefore, should constitute a technical group consisting of members from RBI, Ministry of Commerce, CSO, NASSCOM and a few major software companies to comprehensively examine the data reporting mechanism for software exports.
In a liberalising economy, it becomes increasingly necessary to rely on surveys to plug information gaps. RBI should conduct periodical surveys on dividends and profits arising out of foreign direct investment (FDI) and portfolio investment separately.
There is a need for surveys by RBI on disinvestment in India and abroad by non-residents and resident Indians, respectively.
The RBI should take necessary steps to capture data on portfolio investment by NRIs in order to improve the coverage of the capital account in the BoP.
In order to ensure complete coverage of short-term credit, RBI should institutionalise a mechanism for collection of data on suppliers’ credit up to 180 days, which would have an impact on the capital account of the BoP. This information is also required on stock basis to improve the coverage of the external debt statistics.