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External Sector Balance of Payments - Economics, UPSC, IAS. Notes | Study Indian Economy (Prelims) by Shahid Ali - UPSC

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External Sector Balance of Payments

Balance of Payments

What is the Balance of Payments?

The outcome of the total transactions of an economy with the out world in one year is known as the Balance of Payment.

Basically it is the net outcome of the current and capital accounts of an economy. It might be favourable or unfavourable for the economy.

The Capital Account

The current account shows the net amount a country is earning if it is in surplus, or spending if it is in deficit. It is the sum of the balance of trade (net earnings on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.

Which shows the capital kind of transactions of the economy with the outside economies. Every transaction in foreign currency considered as capital is shown in this account- external lending or borrowing, private remittance’s inflow or outflow, issuing of external bonds etc.

Convertibility

An economy might allow its currency full or partial convertibility in the current and the capital accounts.

If domestic currency is allowed to convert into foreign currency for all current account purpose, it is a case of full current account convertibility.

Similarly, in cases of capital outflow, if domestic currency is allowed to convert into foreign currency, it is a case of full capital account convertibility.

Convertibility in India

Current account

Current account is today fully convertible.

It means that the full amount of foreign exchange required by someone for current purposes will be made available to him at official exchange rate and there could be an unprohibited outflow of forign exchange

Capital account

After the recommendations of the Tarapore committee (1997) on the Capital Account Convertibility, India has been moving in the direction of allowing full convertibility. India is still a country of partial convertibility (40:60).

But full capital convertibility is allowed;

  1. Indian corporate are allowed full convertibility in the automatic route up to $ 500 million overseas ventures
  2. Individuals are allowed to invest in foreign assets, shares up to the level of $ 200000 per annum
  3. Unlimited amount of gold is allowed to be imported

The second committee on the Capital Account Convertibility again under S.S Tarapore handed over its report in 2006 on which RBI/Govt is having consultation

The document External Sector Balance of Payments - Economics, UPSC, IAS. Notes | Study Indian Economy (Prelims) by Shahid Ali - UPSC is a part of the UPSC Course Indian Economy (Prelims) by Shahid Ali.
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