Balance of payments

Also called: BoP · Topic: Balance of Payments and Exchange Rates · NCERT: Class 11, Ch 3 "Liberalisation, Privatisation and Globalisation: An Appraisal"; Class 11, Ch 8 "Comparative Development Experiences of India and its Neighbours"; Class 12, Ch 6 "Open Economy Macroeconomics"

Meaning

Balance of payments (BoP) is a record of all transactions between the residents of a country and the rest of the world over a period, usually one year. It covers trade in goods, trade in services and trade in assets. Residents are the people and firms whose main economic interest is in the country. Citizenship does not decide who is a resident.

The BoP shows how a country pays its way in the world. It tells us whether the country earns enough from abroad, or whether it has to borrow or spend its reserves. India's 1991 crisis was a BoP crisis, so this concept sits at the centre of the story of India's reforms.

Key formula: Current account balance (CAB) = Balance of trade (BoT) + Net invisibles

Explanation

How it is recorded: double entry

• Every transaction is written down twice: once as a credit and once as a debit.
• Credit (+): money comes into India. Examples are exports and remittances received.

• Debit (−): money goes out of India. Examples are imports and dividends paid to foreign investors.

• Every credit has a matching debit, so the BoP as a whole always balances in the accounting sense.

• A "BoP deficit" or "BoP surplus" refers to one part of the accounts, never to the whole.

• The BoP has two main parts:

• the current account, which records flows of income and spending today, and
• the capital (financial) account, which records trade in assets such as foreign investment and loans.

The current account and its components

• It records (i) trade in goods, (ii) trade in services and (iii) transfer payments.
• It is called "current" because these flows do not create a claim that has to be repaid later.
• Balance of trade (BoT) = goods exports − goods imports.
• Trade deficit: imports are greater than exports, so BoT is negative.
• Trade surplus: exports are greater than imports, so BoT is positive.

• BoT covers goods only.

• Invisibles are services, income and transfers. They are called "invisible" because nothing physical crosses the border or passes through customs.

• Non-factor services: traded services that are not payments to labour, land or capital. Examples are shipping, banking, insurance, tourism and software.
• Income: net earnings of factors of production, such as wages, interest, dividends and profits.

• Transfers: receipts for which nothing is given in return, such as gifts, grants and remittances (money that citizens working abroad send home).

• IMF labels (BPM6): BPM6 is the IMF's Balance of Payments Manual, 6th edition, the global standard.

• Factor income is called primary income.
• Transfers are called secondary income.
• The RBI's table reads: goods, services, primary income, secondary income.
• NCERT Class 12 is less precise here. It counts factor income as part of "trade in services".

Worked example: NCERT Table 6.1 (US$ million)

Item	Value
1. Exports (goods)	150
2. Imports (goods)	240
3. Trade balance (1 − 2)	−90
4. Net invisibles (a + b + c)	52
a. Non-factor services	30
b. Income	−10
c. Transfers	32
5. Current account balance (3 + 4)	−38

• Step 1: 150 − 240 = −90, a trade deficit.
• Step 2: 30 + (−10) + 32 = +52, the net invisibles.
• Step 3: −90 + 52 = −38, a current account deficit of 38.
• Note: NCERT labels the trade balance "[2 – 1]". This is wrong. It should be row 1 − row 2.

Surplus, deficit and how a deficit is paid for

• Current account surplus: current receipts are greater than current payments. The country is a lender to the world, because it builds up claims on other countries.
• Current account deficit (CAD): current receipts are less than current payments. The country is a borrower.
• A CAD must be financed in one of two ways:
• a capital account surplus, meaning foreign investment or loans come in, or

• running down forex reserves, meaning the RBI spends its stock of foreign currency.

• Saving-investment link: CA = S − I, where S is national saving and I is domestic investment.

• A CAD means I > S. The country invests more than it saves, and foreign savings fill the gap.

• Example: GDP = ₹100 lakh crore, S = ₹30 lakh crore, I = ₹32 lakh crore. CA = −₹2 lakh crore, a CAD of 2% of GDP.

• What makes the CAD widen:

• Oil price rise: India imports more than 80% of its crude oil, so the import bill rises. Each US$ 10/barrel rise is commonly estimated to widen the CAD by about 0.3-0.4% of GDP.
• Gold rush: when inflation or uncertainty is high, people buy gold as a safe store of value. Gold imports rise and the CAD widens.
• Weaker services or remittances: when the world economy slows, less money comes in through invisibles.

In India

• Who measures it: the RBI compiles India's BoP and publishes it quarterly in press releases. Its current account table follows the IMF's BPM6 format.
• The pattern: a huge goods gap, mostly covered by invisibles.
• The merchandise trade deficit was US$ 337.3 bn in 2025-26, up from US$ 286.9 bn in 2024-25 [2].
• The CAD was only US$ 25.2 bn (0.6% of GDP) in 2025-26 [2], against US$ 22.9 bn (0.6% of GDP) in 2024-25 [2].

• So net invisibles were about +US$ 312 bn in 2025-26. They covered roughly 93% of the goods gap.

• What drives the invisibles surplus:

• Services: software, business services and global capability centres (GCCs), which are offshore units of multinational companies located in India. Net services receipts were US$ 60.4 bn in Q4 2025-26, up from US$ 53.3 bn a year earlier [2].
• Remittances: India is the world's largest remittance recipient, at US$ 135.4 bn in FY25 [3]. The World Bank put India at US$ 129 bn in calendar year 2024, ahead of Mexico (US$ 68 bn) [4].

• Primary income is a net outflow, because foreign investors take home interest and profits. The net outgo was US$ 11.1 bn in Q4 2025-26 [2].

• Quarterly swings: Q4 2025-26 showed a current account surplus of US$ 7.1 bn (0.7% of GDP) [2]. Q4 is often in surplus because services exports and remittances peak in that quarter.

• Reserves in use: forex reserves fell by US$ 23.6 bn in 2025-26 on a BoP basis [2].
• History:
• 1991: large CADs were financed by short-term borrowing. Reserves fell to about two weeks of imports. This forced rupee devaluation and the 1991 reforms.

• 2012-13: the CAD hit a record 4.8% of GDP because of high oil prices and a gold import boom. The government raised the import duty on gold.

• Comfort zone: a CAD of about 2.5-3% of GDP is widely seen as the safe limit. India's recent CAD is well within it.

Don't confuse with

• Balance of trade (BoT): this covers goods only. The BoP covers goods, services, income, transfers and assets. Services are part of invisibles, not BoT.
• Current account deficit: this is a deficit in one part of the BoP. The whole BoP always balances because of double entry.
• Capital account: this records trade in assets, such as FDI, FPI and loans, which create future claims. The current account records flows that do not have to be repaid. Remittances are transfers (secondary income), not capital account items and not services.
• Primary income vs secondary income (BPM6): primary income is factor earnings (wages, interest, dividends, profits). Secondary income is transfers (gifts, grants, remittances).

Prelims Hooks

• BoP records transactions between residents and the rest of the world. Residence depends on the main economic interest, not citizenship.
• The BoP always balances in accounting terms because of double entry. Exports and remittances received are credits. Imports and dividends paid abroad are debits.
• CAB = BoT + net invisibles. Invisibles = services + income + transfers. CA = S − I, so a CAD means investment is greater than saving.
• In BPM6, factor income = primary income and remittances = secondary income. The RBI follows BPM6.
• India's CAD was US$ 25.2 bn (0.6% of GDP) in 2025-26 [2]. The record is 4.8% of GDP in 2012-13.
• NCERT Table 6.1 trap: trade balance = exports − imports (row 1 − row 2) = −90, not "[2 – 1]".

Mains Points

• India's CAD is structural but manageable.
• The goods deficit was US$ 337.3 bn in 2025-26, but invisibles held the CAD to 0.6% of GDP [2].
• These two supports, IT/GCC services and remittances, are exposed to global slowdowns, AI automation and visa or migration rules in host countries.

• Cutting oil imports (renewables, ethanol blending), cutting gold imports (Sovereign Gold Bonds, gold monetisation) and growing electronics exports under the PLI (Production Linked Incentive) scheme all reduce this risk.

• How the CAD is financed matters as much as its size (the lesson of 1991).

• FDI is stable. FPI and short-term debt can leave quickly, as they did in the 2013 "taper tantrum", when money rushed out after the US Federal Reserve signalled it would slow its bond buying.

• Large reserves under a managed float are a buffer, and they are actively used: reserves fell by US$ 23.6 bn in 2025-26 [2].

• The S − I lens (GS-III): a moderate CAD is not always bad.

• If foreign savings pay for productive investment, they can support growth. If they pay for consumption or gold, the CAD is riskier.
• Raising household financial saving and cutting the fiscal deficit narrows the CAD without choking growth.

Related concepts

• Current account (balance of payments)
• Balance of trade
• Trade deficit
• Invisibles
• Non-factor services
• Income account (balance of payments)
• Remittances
• Current account deficit

Read more

• Balance of payments I: the current account