Why in news?
- Amid galloping oil prices and a slowing foreign investment, India’s current account deficit for 2017-18 has touched $48bn, the highest since 2012-13.
- The value of what India’s imports vastly exceed what it exports, spelling concern for our balance of payment (BoP) position.
What is balance of payment?
- Balance of payment is simply a record of all international transactions done by the residents, companies or the government of a country with rest of the world.
- The transactions are recorded as credits and debits.
- For instance, entries like Indians spending to buy foreign goods or spending money in foreign trips will be recorded as debit from the Indian account.
- Similarly foreigners spending money to buy Indian goods or for tourism will be shown as credit to the Indian account.
What is current account deficit?
- Current account is a part of the overall balance of payment and reflects a country’s international trade.
- It primarily measures net trade in goods and services along with all other earnings or payments that are required to be completed in a defined time period.
- Latest data shows India has a $48 billion current account deficit. India’s exports, which are much lower than imports, is the main cause of current account deficit.
- Another major component of India’s deficit is foreign investment income, where profits are repatriated to a company’s origin country.
- India is in surplus in trade in services and a net gainer of remittances.
- These two surplus components, however, are not large enough to offset the trade deficit.
What services bring current account surplus to India?
- The detailed analysis of service component of current account deficit shows that the largest component of India’s services surplus comes from IT industries.
- Similarly, India is a net exporter of travel meaning foreigners visiting India spend more money than Indians visiting foreign countries.
- India has to send abroad a significant amount of money for use of intellectual property.
- India is a net importer of recreational services that include services in film, music industry and so on.
What are the capital and financial account components of balance of payment?
- Earlier balance of payment consisted only of current and capital account.
- The capital account indicated if the country was a net importer or exporter of capital.
- Recently IMF has bifurcated capital account into capital and financial account.
- According to IMF’s definition the capital account measures credit and debit for non-produced non-financial assets and capital transfers. These include entries like land sold to embassies, sales of lease and licences and so on.