The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of India and the rest of the world over a specific period, maintained by the Reserve Bank of India (RBI). This chapter explores the current account, capital account, and their components, tailored for UPSC Prelims preparation.
Current Account
The current account records transactions related to trade in goods, services, income, and unilateral transfers, reflecting India’s day-to-day economic interactions.
Components
Trade in Goods (Merchandise): Exports and imports of tangible goods. India’s merchandise trade deficit was $266 billion in 2024-25, with exports at $437 billion (e.g., petroleum products) and imports at $703 billion (e.g., crude oil).
Trade in Services (Invisibles): Includes IT services, tourism, and transportation. India’s services surplus was $148 billion in 2024, driven by software exports ($178 billion).
Primary Income: Investment income like dividends, interest, and profits. India recorded a net outflow of $35 billion in 2024 due to foreign debt interest payments.
Secondary Income (Transfers): Unilateral transfers like remittances. India’s remittances reached $125 billion in 2024, highest globally, per World Bank.
Example: India’s IT services exports to the US (e.g., TCS, Infosys) contributed significantly to the $148 billion services surplus in 2024, offsetting the merchandise trade deficit.
Capital Account
The capital account records transactions involving capital flows, such as investments and loans, affecting India’s external assets and liabilities.
Components
Foreign Direct Investment (FDI): Long-term investments in physical assets. India attracted $44.8 billion in FDI inflows in 2024, mainly in manufacturing and IT.
Foreign Portfolio Investment (FPI): Short-term investments in stocks and bonds. FPI inflows were $10.2 billion in 2024, per RBI data.
External Commercial Borrowings (ECB): Loans raised abroad by Indian firms. ECB inflows reached $15 billion in 2024, used for infrastructure projects.
Non-Resident Indian (NRI) Deposits: Funds deposited by NRIs in Indian banks. NRI deposits grew by $8 billion in 2024, per RBI.
Short-Term Debt: Includes trade credits and other obligations, contributing $5 billion in 2024.
Example: Amazon’s $2 billion investment in its Indian e-commerce operations in 2024 is an FDI inflow, strengthening the capital account.
BoP Equilibrium and Management
The BoP is balanced by summing the current account, capital account, and changes in foreign exchange reserves. A surplus or deficit in one account is offset by others or reserve adjustments.
Current Account Deficit (CAD): India’s CAD was 1.2% of GDP ($36 billion) in 2024-25, financed by capital inflows and reserves.
Capital Account Surplus: A $70 billion surplus in 2024 offset the CAD, adding to forex reserves.
Forex Reserves: RBI uses reserves ($704 billion in 2024) to manage BoP imbalances, intervening in forex markets to stabilize the rupee.
Regulation: Governed by FEMA, 1999, with RBI and Ministry of Finance oversight.
Example: In 2022, RBI sold $40 billion from reserves to finance a widened CAD due to high oil imports, stabilizing the rupee at ₹82/$1.
Key Concepts for Prelims
Understanding related terms is vital for UPSC Prelims.
Current Account Deficit (CAD): Excess of current account outflows over inflows, expressed as % of GDP (1.2% in 2024-25).
Trade Deficit: Excess of merchandise imports over exports ($266 billion in 2024-25).
Invisibles: Services, income, and transfers in the current account, contributing a $238 billion surplus in 2024.
Foreign Exchange Reserves: Used to finance BoP deficits, reaching $704 billion in 2024.
Key Points for Prelims
BoP comprises current and capital accounts, balanced by forex reserves.
India’s CAD was 1.2% of GDP in 2024-25, financed by FDI and FPI inflows.
Remittances ($125 billion in 2024) are a key secondary income component.
RBI compiles BoP data quarterly under FEMA, 1999.
1991 BoP crisis led to economic liberalization in India.