Transcript Balance of Payments

Balance of Payments
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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.
Components of Balance of
Payments Statement
The balance of payments statement is presented with three major
components:
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Current Account;
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Capital Account; and
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Official Reserves Account.
Components of Balance of
Payments Statement
I. Current Account:
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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 nonresidents, 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.
Components of Balance of
Payments Statement
II. Capital Account:
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The capital account represents transfer of money and other capital
items and changes in the country’s 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.
Components of Balance of
Payments Statement
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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.