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India’s Balance of Payments
Context
Data from the Reserve Bank of India (RBI) showed that India’s current account registered a surplus during the fourth quarter (Jan-Mar) of the 2023-24 financial year. This was the first time in 11 quarters that India had witnessed a surplus.
What is Balance of Payments (BoP)?
- The Balance of Payments (BoP) is like a financial record that tracks all the money flowing into and out of a country from its international transactions.
- It helps understand how much money India gains or lose from its dealings with other countries.
- Components of Balance of Payments:
- Current Account:
- Trade of Goods: This accounts for physical goods (like cars, wheat, gadgets) that India buys from or sells to other countries. If India imports more goods than it exports, it results in a trade deficit.
- Trade of Services (Invisibles): Includes services like banking, IT, tourism, and money transfers from Indians working abroad. In Q4 of 2023-24, India saw a surplus on the current account mainly due to a surplus in invisible services despite a trade deficit.
- Capital Account:
- Records investments rather than day-to-day transactions. It includes Foreign Direct Investment (FDI), Foreign Institutional Investments (FII), banking capital, currency and deposits, trade credits, special drawing rights.
- Foreign Exchange Reserves:
- The BoP always balances through changes in foreign exchange reserves. When India receives more money from exports, investments, or loans than it spends, the RBI adds these dollars to its foreign exchange reserves.
Elements of Current Account
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Positives and negatives of a Current Account Surplus:
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Positives of Current Account Surplus |
Negatives of Current Account Surplus |
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Strengthens domestic currency |
Reduces export competitiveness |
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Increases foreign exchange reserves |
Impacts export-oriented industries |
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Lowers external debt |
Dependency on external demand |
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Boosts economic confidence |
Potential for reduced domestic consumption |
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Supports investment in infrastructure |
Contributes to global imbalances |
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