Balance of Payments  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: Current Account; Current Account; Capital Account; and Capital Account; and Official Reserves Account. Official Reserves Account.

Components of Balance of Payments Statement I.Current Account: 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 non- residents, other than financial items. 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 non- residents, other than financial items. The current account consists of transactions relating to merchandise as well as invisibles. 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. 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. Invisibles: Invisibles include services, transfers and investment income.

Components of Balance of Payments Statement II.Capital Account: 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. 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. 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. 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. 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 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. 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. 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.