Balance of Payments of India at Current Account

The Balance of Payments (BoP) is a comprehensive record of all economic transactions between the residents of a country and the rest of the world during a specific period, usually a year. It is divided mainly into two components: the Current Account and the Capital and Financial Account. The Current Account of India’s Balance of Payments reflects the flow of goods, services, income, and current transfers between India and other countries. It serves as a crucial indicator of the nation’s external economic stability, trade competitiveness, and overall macroeconomic health.

Structure and Components of the Current Account

The Current Account measures the difference between a country’s receipts and payments arising from four main categories:

1. Merchandise Trade (Visible Trade): This includes the export and import of tangible goods such as petroleum, machinery, textiles, gems and jewellery, and agricultural products. The difference between exports and imports of goods is termed the trade balance. A surplus occurs when exports exceed imports, while a deficit occurs when imports are higher.
2. Invisibles: Invisibles refer to transactions that do not involve the transfer of physical goods. They are subdivided into three major components:
   • Services: Exports and imports of services such as IT and software, tourism, transport, insurance, and financial services. India has been a net exporter of services, particularly in the IT and business process outsourcing (BPO) sectors.
   • Primary Income: This includes income earned by residents from abroad (such as compensation of employees, interest, and dividends) and income paid to foreign investors in India.
   • Secondary Income (Current Transfers): Transfers that involve no quid pro quo, such as remittances sent by Indian workers abroad and grants or donations received from foreign entities.

The Current Account Balance is calculated as:
Current Account Balance = (Exports of Goods and Services + Primary Income Receipts + Secondary Income Receipts) – (Imports of Goods and Services + Primary Income Payments + Secondary Income Payments)
A Current Account Deficit (CAD) indicates that a country imports more goods, services, and income than it exports, while a Current Account Surplus indicates the opposite.

Trends in India’s Current Account

India’s current account has historically been in deficit due to a persistent trade deficit in goods, partially offset by surpluses in services and remittances. The trends can be analysed over different periods:
1. Post-Independence to 1991: During this period, India followed an import-substitution strategy, relying heavily on imports of capital goods, oil, and technology, while exports remained limited. The result was a chronic current account deficit, often financed through external borrowing and foreign aid. The situation culminated in the Balance of Payments Crisis of 1991, when India’s foreign exchange reserves fell to critically low levels, prompting economic liberalisation and external sector reforms.
2. Post-Liberalisation Period (1991–2008): After the 1991 reforms, India’s export base diversified, and foreign investment inflows increased. The services sector, especially software exports, emerged as a key driver of current account receipts. Workers’ remittances also grew substantially. Although the trade deficit persisted, the combined effect of service exports and remittances kept the CAD moderate, averaging around 1–2 per cent of GDP.
3. Global Financial Crisis and Aftermath (2008–2013): The global financial crisis led to volatility in trade and capital flows. Rising crude oil prices and high gold imports widened India’s current account deficit to an alarming level, reaching 4.8 per cent of GDP in 2012–13. The government responded with measures to curb gold imports, promote exports, and stabilise the rupee.
4. Recent Trends (2014–Present): Since 2014, India’s current account position has generally improved due to lower crude oil prices, steady growth in services exports, and resilient remittances. However, the COVID-19 pandemic temporarily altered trade and service flows.

• In 2020–21, India recorded a current account surplus of around 0.9 per cent of GDP, mainly due to a sharp decline in imports and a strong IT services performance.
• In 2021–22, the account reverted to a deficit of 1.2 per cent of GDP, as imports rebounded faster than exports during post-pandemic recovery.
• For 2022–23, India’s CAD widened to around 2 per cent of GDP, influenced by high global oil prices and a surge in non-oil imports, despite robust export growth.

Major Determinants of India’s Current Account Balance

Several factors influence India’s current account position:

• Oil Prices: As India imports over 80 per cent of its crude oil requirement, fluctuations in international oil prices have a direct impact on the trade deficit.
• Export Competitiveness: Growth in merchandise and service exports depends on global demand, exchange rate stability, and domestic production capacity.
• Exchange Rate Movements: A depreciation of the rupee tends to make exports more competitive but increases the cost of imports.
• Global Economic Conditions: Worldwide recessions, trade barriers, and geopolitical tensions affect India’s export performance.
• Remittances and Service Receipts: Strong inflows from the Indian diaspora and IT services help mitigate the trade deficit.
• Domestic Consumption and Investment Patterns: High domestic demand for imported goods and capital equipment can widen the deficit.

Role of Services and Remittances

India’s service exports, especially in software, finance, and consultancy, have been a major stabilising factor in the current account. The IT and ITeS sector accounts for over 40 per cent of total service exports.
Additionally, remittances from Non-Resident Indians (NRIs) play a crucial role in maintaining current account balance. India consistently ranks among the top recipients of remittances globally, receiving over US$100 billion in 2023, primarily from the Middle East, North America, and Europe. These inflows contribute to the secondary income surplus and strengthen external resilience.

Policy Measures and Management

The Reserve Bank of India (RBI) and the Government of India actively monitor and manage the current account to ensure external sector stability. Key measures include:

• Export Promotion: Incentives under schemes like the Remission of Duties and Taxes on Exported Products (RoDTEP) and the Production-Linked Incentive (PLI) schemes aim to boost export competitiveness.
• Import Rationalisation: Efforts to reduce dependence on oil and gold imports through energy diversification, renewable energy promotion, and domestic manufacturing.
• Exchange Rate Management: RBI intervenes in the foreign exchange market to prevent excessive volatility and maintain adequate foreign exchange reserves.
• Trade Agreements: Participation in regional and bilateral trade agreements to expand export markets and secure supply chains.

Implications of Current Account Deficit

A moderate current account deficit is normal for a developing country like India, as it reflects investment-driven import demand. However, a persistent or widening deficit can have adverse implications:

• Currency Depreciation: Higher demand for foreign exchange can weaken the rupee.
• Inflationary Pressure: A weaker currency increases the cost of imports, particularly fuel.
• External Debt Increase: Financing large deficits through borrowing can raise debt servicing burdens.
• Vulnerability to Capital Flow Reversals: Dependence on foreign capital to finance the deficit exposes the economy to global financial volatility.