In News- Recently the Commerce and Industry said that India’s balance of payments this year is going to be “very very strong” on the back of significant improvement in exports and a fall in imports. 

What is Balance of Payment Account?

  • It is a systematic record of all economic transactions between the residents of one country with the residents of the other country in a financial year. 
  • Economic Transactions include all the foreign receipts and payments made by a country during a given financial year. 
  • There are two components of BoP-  
    •  Current Account
    •  Capital Account
  • Current Account deals with current, ongoing, short term transactions like trade in goods, services (invisible) etc. It reflects the nation’s net income. It has broadly 4 components. 
    • Goods – trade in goods
    • Services (invisible) – trade in services e.g. tourism
    • Income – investment income
    • Current unilateral transfers – donations, gifts, grants, remittances Note that grants might appear as the component of the capital account but are included in the current account as they are unilateral and creates no liability. The recipient does not have to give anything back in return.
  • Capital Account deals with capital transactions i.e. those transactions which create assets or liabilities. It reflects the net changes in the ownership of national assets. It also has broadly 4 components
    • Foreign Direct Investment (FDI)
    • Foreign Portfolio Investment (FPI)
    • External Borrowings such as ECB
    • Reserve Account with the Central Bank. 

What is Current Account Deficit (CAD)? 

  • The current account measures the flow of goods, services, and investments into and out of the country. It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
  • Current Account Deficit is slightly different from the Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services. Whereas, the current account also factors in the payments from domestic capital deployed overseas.
  • There is a deficit in Current Account if the value of the goods and services imported exceeds the value of those exported.
  • A nation’s current account maintains a record of the country’s transactions with other nations, that includes net income, including interest and dividends, and transfers, like foreign aid. It comprises of following components:
    • Trade of goods,
    • Services, and Net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
  • It is measured as a percentage of GDP. The formulae for calculating CAD is:
    • Current Account = Trade gap + Net current transfers + Net income abroad
    • Trade gap = Exports – Imports.