India’s BoP at Current Account

As we studied above, the BoP in India has been classified into

• BoP at current account
• BoP at Capital Account

India’s BoP at Current Account

This is calculated as follows:

Exports

– Imports

= Trade Balance (1)

Invisible Payments

– Invisible Receipt

= Net Invisibles (2)

(1) + (2) = BoP on Current Account.

This can be understood by the following table taken from Economic Survey of India 2010-11.

The above picture is again partial unless we see the historical trend of BoP of the country. Its worth note that from 1951 till 1990-91, the Net Invisibles of the country was always positive. It was for the first time in 1990-91, that the Net invisibles of the country went to a negative zone with a deficit of Rs. 433 Crore. The net invisibles work a a cushion to neutralize the Trade deficit of the country. In 1990-91, there was a large net outflow of the investments from the country, and the total BoP of the country went to Rs. 17367 Crore. The following table shows the Trade deficit & Current Account of the country since 1990-91:

The above data gives an Inverted U shape of chart of India’s BOP (Current Account)

The survey notes that the BoP developments during 2009-10 indicate that despite lower trade deficit, current account deficit widened on account of slowdown in invisible receipts. There was also sharp increase in capital flows, which led to accretion in foreign exchange reserves. The current account deficit of 2.8 per cent of the gross domestic product (GDP) in 2009-10 vis-a-vis 2.3 per cent in 2008-09, however remained well within manageable limits. The net capital flows increased substantially to 3.8 per cent of GDP in 2009-10 as compared to 0.5 per cent in 2008-09. This led to net accretion of US$ 13.4 billion in foreign exchange reserves on BoP basis, as against the net outflow of US$ 20.1 billion in 2008-09.