Components of Balance of Payments

Components of Balance of Payments
Balance of Payments is generally grouped under the following heads

i) Current Account
ii) Capital Account
iii) Unilateral Payments Account
iv) Official Settlement Account.
Current Account
“The Current Account includes all transactions which give rise
to or use up national income.”
The Current Account consists of two major items, namely:
i) Merchandise exports and imports, and
ii) Invisible exports and imports.
Merchandise exports, i.e., the sale of goods abroad, are credit entries because all transactions giving rise
to monetary claims on foreigners represent credits. On the other hand, merchandise imports , i.e.,
purchase of goods from abroad, are debit entries because all transactions giving rise to foreign money
claims on the home country represent debits. Merchandise imports and exports form the most
important international transaction of most of the countries .Invisible exports, i.e., sales of services, are
credit entries and invisible imports, i.e. purchases of services, are debit entries. Important invisible
exports include the sale abroad of such services as transport, insurance, etc., foreign tourist expenditure
abroad and income paid on loans and investments (by foreigners)in the home country form the
important invisible entries on the debit side.
Capital Account
The Capital Account consists of short- terms and long-term capital transactions A capital outflow
represents a debit and a capital inflow represents a credit. For instance, if an American firm invests
Rs.100 million in India, this transaction will be represented as a debit in the US balance of payments and
a credit in the balance of payments of India. The payment of interest on loans and dividend payments
are recorded in the Current Account, since they are really payment s for the services of capital. As has
already been mentioned above, the interest paid on loans given by foreigners of dividend on foreign
investments in the home country are debits for the home country, while, on the other hand, the interest
received on loans given abroad and dividends on investments abroad are credits.
Unilateral Transfers Account
Unilateral transfers is another terms for gifts. These unilateral transfers include private remittances,
government grants ,disaster relief, etc. Unilateral payments received from abroad are credits and those
made abroad are debits.
Official Settlements Accounts
Official reserves represent the holdings by the government or official agencies of the means of payment
that are generally accepted for the settlement of international claims
Main Components of India's Balance of Payments ↓
1. Trade Balance
Trade balance was in deficit through out the period shown in the table as imports always exceeded the
exports. Within the imports the POL items constituting a sizeable position continued to increase throughout.
Exports did not achieve the required growth rate. Trade deficit in 2005-06 stood at $ -51,841 billion US $.
2. Current Account
Current account balance includes visible items (trade balance) and invisibles is in a more encouraging
position. It declined to $ -2,666 million in 2000-01 from $-9680 million in 1990-91 and recorded a surplus in
2003-04 to the extent of $ 14,083 million. In 2005-06, once again there was a deficit of $ 9,186 million. The
main reason for the improvement during 2001-05 was the success of invisible items.
3. Invisible
The impressive role placed by invisibles in covering trade deficit is due to sharp rise invisible receipts. The
main contributing factor to rise in invisible receipts are non factor receipts and private transfers. As far as
non factor services receipts are concerned the main development has been the rapid increase in the exports
of software services. As far as private transfers are concerned their main constituent is workers remittance
from abroad. During this period the private transfer receipts also increased from $ 2,069 million in 1990-91
to $ 24,102 million in 2005-06. The current trend of outsourcing a number of jobs by the developed countries
to the developing ones is also helping us to get more jobs and earn additional foreign exchange.
4. Capital Account
Capital account has been positive throughout the period. NRI deposits and foreign investment both portfolio
and direct have helped to a great extent. The main reasons for huge increase in capital account is due to
large capital inflows on account of Foreign direct investment (FDI); Foreign Institutional Investors (FIIs)
investment on the stock markets and also by way of Euro equities raised by Indian firms. The Non-resident
deposit also form a part of capital account.
5. Reserves
Reserves have changed during this period depending on a balance between current and capital account. An
increase in inflow under capital account has helped us to build up our foreign exchange reserve making the
country quiet comfortable on this count. In April 2007 we had $ 203 billion foreign exchange reserves.
The year 2005-06 registered the highest trade deficit so far running into $ 51,841 million, because of rising
Oil prices; As a result despite impressive positive earnings of as much as $ 42,655 million from invisibles,
the current account deficit in this year was $ 9,189 million which is 1.1% of GDP.
Conclusion ↓
The balance of payment situation started improving since 1992-93. There was a satisfactory balance of
payment position in that period; the reasons are (i) High earnings from invisibles, (ii) Rise in external
commercial borrowings, and (iii) Encouragement to foreign direct investment.
The positive earnings from invisibles covered a substantial part of trade deficit and current account deficit
reduced significantly. The external commercial borrowings was extensively used to finance the current
account deficit. The net non resident deposits were positive through out the ten year period. There has been
a growing strength in India's balance of payment position in the post reform period inspite of growing trade
deficit and current account deficit.

Components of Balance of Payments

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Components of Balance of Payments

Balance of Payments is generally grouped under the following heads

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