Balance of payments accounts and its components

1. Balance of Payments

2. BALANCE OF PAYMENTS
• It is a double entry system of record of all
economic transactions between the residents
of the country and the rest of the world
carried out in a specific period of time.
• It takes into account the export and import of
both visible and invisible items.

3. BOP statement includes
• All the receipts on account of goods exported
• Services rendered
• Capital received by residents
• Payments of residents
• Capital transferred to foreign

4. Balance of trade
• It deals with exports and imports of
visible items only.
• It takes into account only merchandise
exports & imports only.

5. Components of Balance of Payments
• Current account
• Capital account

6. Current Account
– It includes visible exports and imports, and
invisible items like receipts and payments for
various services.
– It contains credit and debit items.
– Credit includes merchandise exports and invisible
exports.
– Debit includes merchandise imports and invisible
imports.

7. BOP position of India on current account
• Its position is satisfactory at first five year plan. During
the period inflow of foreign capital was 127 cr. Deficit
of current account was only 42.3 cr.
• The second and third five year plans recorded negative
balance of payments.
• The fourth and fifth five year plans recorded positive
balance of payments with 100 cr. and 3082 cr.
respectively.
• From 1985-86 to 1989-90 Balance of Payments are
negative.
• During 2001-02 to 2004-05 India have surplus of BOP,
but 2005-06 onwards it suffered with the deficit. Again
India experienced positive BOP in 2008-09.

8. Reasons for Deficit Balance
• Government liberalized imports in 1985 this leads to
the increase in imports significantly.
• the Gulf war in 1990’s
• the rapid industrialization (import of capital goods,
technology, etc.)
• the slow growth of invisibles
• the devaluation/depreciation of rupee against
importing countries
• 1990-91 crisis
• less exports

9. Capital Account
• It is divided into
– private capital
– banking capital and
– official capital

10. Private capital
• Long term (> 1 year)
» Foreign investments
» Long term loans
» Foreign currency deposits
» Estimated portion of the unclaimed receipts allocated to the CA
• Short term (< 1 year)

11. Bank capital
• External financial assets
• Liabilities of commercial and
cooperative banks authorized to deal
in foreign currency

12. Official capital
– RBI’s holdings in terms of foreign currency & Special
Drawing Rights
– Capital outflow from home country to a foreign
country is treated as debit.
– The inflow of capital from a foreign country to home
country is credit.
– Credit includes foreign long-term investment in the
home country and short term investment in the home
country
– Debit includes long term investments in foreign
country and short term investments in foreign
country.

13. Unilateral payment/transfers account
– These are ‘giving the gifts’
– These include Government grants, private
remittances, disaster relief, etc.
• Ex. India gave grant to an African country it is debit side
of India’s BOP a/c and credit side of the African country.

14. Official Settlements Account
• The official sales of foreign currencies and other
reserves to foreign countries or official purchases of
foreign currencies or other reserves from foreign
countries.