From UPSC perspective, the following things are important :
Prelims level : External sector of India, BoP, BoT
Mains level : NA
India’s current account balance saw a far lower surplus of $6.5 billion (0.9% of GDP) in the first quarter compared with a surplus of $19.1 billion (3.7% of GDP) a year earlier.
What is External Sector?
- The external sector is the portion of a country’s economy that interacts with the economies of other countries.
- In the goods market, the external sector involves exports and imports.
- In the financial market it involves capital flows.
Various terminologies related:
[A] Balance of Payment (BoP)
- BoP is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
- These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
- It consists of two components: the current account and the capital account.
- The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.
(1) Current Account
- Current account of BoP consists of all transactions relating to goods, services and income, it is functionally classified into merchandise and
- Current account deficit is the situation where payments on the country are more than the payments into the country.
- In current account surplus, there is a net inward payment into the country on the current.
(2) Capital Account
- The capital account records the net flow of investment transaction into an economy.
- Investments (FDI and FII) and borrowings (ECB) are part of the capital account.
[B] Balance of Trade
- Trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.
- If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
- If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.