The balance of payments (BoP) is the transactions in goods, services, and assets between residents of a country with the rest of the world for a specified period, typically a year. A country’s BoP reveals its financial and economic status and helps the government decide on fiscal and trade policy records. There are three components of BoP viz. current account, capital account, and financial account. (A) Current account: It is the record of trade in goods and services and transfer payments. The current account is in balance when receipts on the current account are equal to the expenditure/payments on the current account. Similarly, the current account could be in surplus or deficit depending upon the quantum of receipts and expenditure on the current account. It includes various components like:

• Trade in goods, which includes exports and imports of goods. The difference between the values of exports and the values of imports of goods of a country in a given time is called the Balance of Trade (BoT).
• Trade in services, which includes factor income and non-factor income transactions. Net factor income has two components i.e., net income for compensation of employees and net investment income. Net non-factor income includes examples like shipping, banking, insurance, tourism, software services, etc.
  • The difference between the values of exports and the values of imports of invisibles like services, transfer and flows of income, etc. is called Net Invisibles.
• Transfer payments are the receipts that the residents of a country get for free without having to provide any goods or services in return. They consist of gifts, remittances, and grants and could be given by the government or by private citizens living abroad. (B) Capital account: It records all international transactions of assets. An asset is any one of the forms in which wealth can be held, for example, money, stocks, bonds, government debt, etc. The purchase of assets is a debit item on the capital account while the sale of assets like the sale of shares of an Indian company to a foreigner is a credit item on the capital account. Various components of capital account include:
• Investments: It includes direct investment and portfolio investment. Direct investments include FDI, equity capital, reinvested earnings, and other direct capital flows while portfolio investment includes FII, offshore funds, etc.
• External borrowing: It includes External Commercial borrowings, short-term debt, etc.
• External assistance: It includes government aid, inter-governmental, multilateral and bilateral loans, etc.

(C) Financial account: The flow of funds from and to foreign countries through various investments in real estate, business ventures, FDI, etc. is monitored through the financial account. This account measures the changes in the foreign ownership of domestic assets and domestic ownership of foreign assets. As per the IMF’s new accounting standards financial accounts have also been included as a component of BoP. India has also made the changes but the RBI continues to publish data according to the old classification as well.