Balance of Payments

1
Balance of Payments

• Balance of Payments is the systematic summary of
  the economic transactions of the residents of a
  country with the rest of the world during a
  specified time period, normally a year.
• Such economic transactions may arise from
• 1. Movement of goods in the form of exports or
  imports.
• 2. Rendering of services abroad and using foreign
  services.
• 3. Gifts/grants from one country to another.
• 4. Investments made abroad or received from
  abroad.
• 5. Income on investments received from abroad or
  remitted abroad.
• 6. Increase or decrease in the international
  reserves of the country.

2
Components of Balance of Payments Statement

• The balance of payments statement is presented
  with three major components
• Current Account
• Capital Account and
• Official Reserves Account.

3
Components of Balance of Payments Statement

• I. Current Account
• The current account of the balance of payments
  refers to transactions in goods and services,
  income and current transfers. In other words, it
  covers all transactions between residents and
  non-residents, other than financial items.
• The current account consists of transactions
  relating to merchandise as well as invisibles.
• Merchandise Merchandise represents exports and
  imports of commodities from/into India. The
  credit in the item represents exports and debit
  represents imports. The net balance, being the
  difference between exports and imports, is known
  as balance of trade.
• Invisibles Invisibles include services,
  transfers and investment income.

4
Components of Balance of Payments Statement

• II. Capital Account
• The capital account represents transfer of money
  and other capital items and changes in the
  countrys foreign assets and liabilities
  resulting from the transactions recorded in the
  current account.
• Capital account consists of foreign investment in
  India, loans, commercial borrowings, short-term
  credit, etc.
• Foreign investments in India can be classified
  into foreign direct investment and portfolio
  investment.
• FDI is the amount invested by non-residents in
  the equity of entities in India. The difference
  between direct and portfolio investment is one of
  the intention of the investor.

5
Components of Balance of Payments Statement

• Direct investment reflects a lasting interest of
  the investor in the entity and his intention to
  take active role in the management of the
  company. Investment in equity by the direct
  investor and the amounts accruing on the original
  investment but retained in the country fall under
  the category of direct investment.
• Portfolio investment covers the transactions in
  equity securities other than direct investment.
  The investor does not intend to take part in the
  management of the company.