Balance of Payment (BoP) of a country can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
- It indicates whether the country has a surplus or a deficit on trade.
- When exports exceed imports, there is a trade surplusand when imports exceed exports there is a trade deficit.
Purposes of calculation of BoP:
- Reveals thefinancial and economic status of a country.
- Can be used as an indicatorto determine whether the country’s currency value is appreciating or depreciating.
- Helps the Government to decide on fiscal and trade policies.
- Provides important information to analyze and understand the economic dealings of a country with other countries.
Components of BoP:
- For preparing BoP accounts, economic transactions between a country and rest of the world aregrouped under – Current account, Capital account and Errors and Omissions. It also shows changes in Foreign Exchange Reserves.
- Current Account:It shows export and import of visibles (merchandise or goods) and invisibles (non merchandise).Invisibles include services, transfers and income.
- Capital Account:It shows a capital expenditure and income for a country.It gives a summary of the net flow of both private and public investment into an economy.
External Commercial Borrowing (ECB), FDI, FPI, etc form a part of capital account.
Balance of payments showed a surplus of $3.4 billion in the fourth quarter of the financial year 2020/21, compared with a surplus of $18.8 billion a year earlier.
FDI inflows-Despite the pandemic, the net foreign direct investment inflows at $44 billion were higher in FY21 than the $43.0 billion in 2019-20.Net foreign portfolio investments also increased by $36.1 billion in FY21 as compared to $1.4 billion a year ago.
External commercial borrowings by India Inc recorded an inflow of $0.2 billion as compared to $21.7 billion in 2019-20, the RBI data showed.
Foreign exchange reserve- There was an accretion of $87.3 billion to foreign exchange reserve on a balance of payments basis.