The balance of payments of a country is a systematic record of all economic transactions between the residents of the reporting country and residents of foreign countries during a given period of time.
A complete BoP account comprises the following two broad accounts: (a) Current Account; and (b) Capital and Financial Account.
Current Account :
The current account deals with the trade of goods and services between two countries.In international trade “invisibles” includes :
- Services (like transportation, financial services, travel, telecommunication, computer services and professional services)
- Transfer (It includes remittances from the Indian working abroad)
- Income (These are the income earned like profits, interest and dividends from the ownership of overseas assets by Indian companies, government and individuals)
While “goods ” are termed as visibles.
If Current Account balance is positive , then it is termed as Current account surplus and if it is negative then It is termed as Current Account Deficit(CAD).
Balance of Trade = export of goods –Import of goods. This is a part of current account balance.
Capital account Transactions:
It basically deals with investment and borrowings. For example, foreign investment in India, how much money borrowed by Indian companies. Similarly, Indians to open bank accounts in foreign countries; invest abroad; hold assets abroad etc.
It includes:
- Foreign direct investment (FDI) refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants.
- FII(Foreign Institutional Investment)or Portfolio investment refers to the purchase of shares and bonds in Indian share market by the foreigners.
- ECB(External Commercial Borrowing) Money borrowed by Commercial companies from abroad.
- Sovereign Debt : Money borrowed by Govt of India
