CURRENT ACCOUNT AND CAPITAL ACCOUNT OF BOP
BOP account is divided into two accounts – current account and capital account.
Current account records imports and exports of goods, services and unilateral transfers.
(a) Goods. Shows export and import of visible items like wheat, rice, machine, etc.
(b) Services/Invisibles. Main services that are made use of in the international trade are shipping, insurance
and banking services.
(i) Shipping, Insurance and Banking Services. Ships have to be hired for transporting goods from one country to another. The merchandise carried by the ships has to be insured for any loss and damage in transit. Banking services are used to facilitate receipts from and payments to foreign dealers.
(ii) Investment Income. When foreign companies make investment in India’s industry and trade, the profit made by them in India have to be paid to their shareholders in the form of dividend. Similarly, interest has to be paid to foreign creditors for money borrowed in the past.
(iii) Foreign Travel. When foreign tourists come to India, they bring in foreign currency with them and convert it into our currency to spend it in our domestic market. The country receives foreign currency. Similarly, when Indian tourists go abroad, they have to convert Indian currency foreign currency to spend it abroad. This involves an outflow payment of foreign exchange.
(iv) Miscellaneous. Includes all residual transactions of the current account such as royalties, management fees, subscription journals, consultancy, telephone and telegraph services, etc.
(c) Transfer Payments. Unilateral transfers between residents and non – residents. Can be private which gifts, donations, etc., or official which include donations, grants by foreign governments, contribution from UN, WHO, etc.
Capital account records capital transfer such as loans and investment between one country and the rest of the world which causes a change in the asset or liability status of the residents of a country or its government.
(a) Private Capital. Only resident’s long-term or short-term capital transactions are included.
(b) Banking Capital. Includes foreign financial assets and liabilities the government and the central bank receipts of repurchases from IMF.
(c) Official Capital is divided into:
(i) Loan includes credit granted by foreign governments and international institutions to central and state governments.
(ii) Amortisations of capital means purchase and resale of securities sold to the foreigners.
(iii) Miscellaneous errors and omissions indicate understatement or overstatement of receipts and payments.
(d) Gold and Foreign Capital are essential for stabilizing foreign exchange rate of the home currency. Net balance of capital account shows a country’s overall balance payments positions. The capital account balance may show surplus deficit.