BALANCE OF PAYMENTS
The transactions in goods, services and assets between citizens of a nation and the rest of the world are documented in the balance of payments (BoP) for a given time period, usually a year. These transactions are in - goods (visibles), services (invisibles) and capital (loans, deposit, investment).
The Balance of Payment consists of two primary accounts
• Current Account
• Capital Account.
CURRENT ACCOUNT
Current Account is the record of trade in goods and services and transfer payments.
Trade in goods includes exports and imports of goods. Trade in services includes factor income and non-factor income transactions. Transfer payments are the receipts which the residents of a country get for ‘free’, without having to provide any goods or services in return. They consist of gifts, remittances and grants. They could be given by the government or by private citizens living abroad.
Buying foreign goods is an expenditure from our country and it becomes the income of that foreign country. Hence, the purchase of foreign goods or imports decreases the domestic demand for goods and services in our country. Similarly, selling of foreign goods or exports brings income to our country and adds to the aggregate domestic demand for goods and services in our country.
The Current Account Deficit (CAD) is a challenging issue at a time when world is facing chaos whether middle east and Iran crisis or Russia-Ukraine crisis it increases the CAD of India to 1.3% of GDP from 0.7% in 2023-24 contribute to a great amount of trade deficit with 7.9% of GDP.
Net Invisibles (services, income, and private transfers) reached $190,127 million.
Components of Current Account
Balance on Current Account
Current Account is in balance when receipts on current account are equal to the payments on the current account. A surplus current account means that the nation is a lender to other countries and a deficit current account means that the nation is a borrower from other countries.
Balance on Current Account has two components
• Balance of Trade or Trade Balance
• Balance on Invisibles
Balance of Trade (BOT) or Balance of Visibles
Balance of Trade (BOT) or Balance of Visibles is the difference between the value of exports and value of imports of goods of a country in a given period of time.
• Export of goods is entered as a credit item in BOT,
whereas import of goods is entered as a debit item in BOT. It is also known as Trade Balance.
BOT is said to be in balance when exports of goods are equal to the imports of goods.
If, Exports = Imports Trade Equilibrium
A nation will have a trade surplus, also known as surplus BOT, if it exports more goods than it imports.
If, Exports > Imports Trade Surplus
Whereas, Deficit BOT or Trade deficit will arise if a country imports more goods than what it exports.
If, Exports < Imports Trade Deficit
| Narrow concept | Broader Concept | |
| It is part of Current Account. | It consists of Balance of Trade. | |
| In the case of India, BOT has al has been in a trade deficit. | Balance of Invisibles Invisibles include services, tran take place between different co ways been negative, i.e., India Services trade includes both Factor income includes net inte of production (like labour, la income is net sale of service pr tourism, software services, etc. Note: In India’s case, despite dividends, the balance of invisi since India has always been a ne | sfers and flows of income that untries. factor and non-factor income. rnational earnings on factors nd and capital). Non-factor oducts like shipping, banking, a net outflow of interest and bles has always been positive t exporter of services and the |
| Balance of Trade | world’s largest recipient of rem Balance in Current Account | ittances. |
| It consists of only visible items/ merchandise. | It consists of both - visiblesBalance of Current Accoun and invisibles.Balance of | t = Balance of Visibles + Invisibles |
Remittances
The term is derived from the word remit, which means to send back. Remittance refers more broadly to the funds migrants send to their relatives in their home country while working and living abroad. These are also referred to as worker or migrant transfers.
They are a significant source of foreign exchange and revenue for many developing nations, particularly those in South Asia. Remittances have the potential to lower poverty, raise living standards, promote health and education and boost the economy.
India holds the first position in the by receiving an amount of $135.4 billion as a remittance in FY 2025.
Top country with highest remittance India: ($135.4) billion
Mexico: ($68) billion China: ($48) billion Philippines: ($40) billion
CAPITAL ACCOUNT
Capital Account records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example: money, stocks, bonds, Government debt, etc.
Purchase of assets is a debit item on the capital account. If an Indian buys a UK Car Company, it enters capital account transactions as a debit item (as foreign exchange is flowing out of India).
On the other hand, the sale of assets like the sale of shares of an Indian company to a Chinese customer is a credit item on the capital account.
Components o f Capital Account
Balance on Capital Account
• When capital inflows (such as receiving loans from overseas, selling assets or shares in foreign corporations) equal capital outflows (such as loan repayment, buying assets or shares in foreign nations), the capital account is in balance.
• Surplus in capital accounts arises when capital inflows are greater than capital outflows, whereas deficit in capital account arises when capital inflows are lesser than capital outflows.
