Balance of payments

Also called: BoP · Topic: International Trade: Patterns, Ports and the WTO · NCERT: Class 12, Ch 8 "International Trade"

Meaning

Balance of payments (BoP) is the full record of all money transactions between one country and the rest of the world over a fixed period, such as a year or half a year. It covers trade in goods and services, income, transfers, investment and loans. It matters because it shows whether a country is earning enough from the world to pay for what it buys. A deficit that continues year after year slowly uses up the country's financial reserves.

Explanation

Two main parts of the BoP

• Current account: day-to-day earning and spending with the world.
• Goods: exports minus imports of goods. This is the balance of trade, also called "visible" trade.
• Services: transport, travel, IT, finance and similar services. These are "invisible" trade.
• Income: interest and profits earned abroad or paid abroad.

• Transfers: money sent with nothing bought in return, such as remittances (money sent home by people working abroad).

• Capital and financial account: money that comes in or goes out as investment or borrowing.

• FDI (foreign direct investment): buying or setting up businesses in another country.
• FPI (foreign portfolio investment): buying shares and bonds in another country.
• Loans and banking capital.

Account	What it records
Current account	Goods + services + income + transfers
Capital and financial account	FDI, FPI, loans, banking capital

How a goods deficit is softened

• Cause: a country imports more goods than it exports, so it runs a trade deficit (a shortfall in goods trade).
• Process: money earned from services, income and remittances, together called net invisibles, pays for part of that gap.
• Result: the current account deficit ends up much smaller than the trade deficit.
• India, first half of 2024-25 (April–September) [5]:
• Merchandise trade deficit: US$ 140.4 billion
• Net invisibles: +US$ 119.0 billion
• Secondary income, mainly remittances: US$ 55.5 billion
• Current account deficit: only US$ 21.4 billion (1.2% of GDP) [5]

What happens to reserves

• Foreign-exchange reserves are the stock of foreign currency held by the central bank.
• When reserves grow: capital inflows are bigger than the current account deficit, so the extra money is added to reserves.

• In H1 2024-25, India's reserves rose by US$ 23.8 billion (BoP basis) [5].

• When a deficit continues for years:

• The country keeps spending more than it earns.
• It pays the gap from its reserves or by borrowing.

• In the end, its financial reserves run out. This is the NCERT point in exercise 2(ii).

• India's 1991 crisis: reserves fell so low that they could pay for only a few weeks of imports. This crisis pushed India to reform its economy.

Where it occurs

• India: India has had a merchandise trade deficit in most years since independence. The main reasons are large imports of crude oil, gold, electronics and machinery.
• FY 2024-25: goods exports US$ 437.42 billion and goods imports US$ 720.24 billion, giving a trade deficit of US$ 282.83 billion [4].

• Services exports were US$ 383.51 billion and services imports US$ 194.95 billion. This gave a services surplus of about US$ 189 billion, which covers a large part of the goods deficit [4].

• China: it has a large trade surplus, which grew from US$ 993 billion (2024) to US$ 1.19 trillion (2025). Most of the rise came from its trade with Europe, Asia and Africa [2]. The surplus adds to its foreign-exchange reserves.

• Germany and the Gulf oil exporters (Saudi Arabia, UAE and others): these countries usually export more than they import, so they have a favourable balance.
• The world as a whole: world trade in goods and services, counted on a BoP basis, was US$ 34.65 trillion in 2025, up 7% [2]. Services were 26.4% of global trade in 2024 on the same basis, the highest share since 2005 [3].

Don't confuse with

• Balance of trade: this is only exports minus imports of goods. It is just one part of the current account. The BoP covers everything: goods, services, income, transfers and capital flows.
• Current account vs capital and financial account: remittances and services belong in the current account. FDI, FPI and loans belong in the capital and financial account.
• Trade deficit vs current account deficit: a country can have a large trade deficit and still have a small current account deficit, because services and remittances fill most of the gap. India's goods deficit was US$ 140.4 billion in H1 2024-25, but its current account deficit was only US$ 21.4 billion [5].
• Foreign-exchange reserves: these are the stock of foreign currency held by the central bank. The BoP is the record of flows over a period, and its overall result adds to reserves or takes away from them.

Prelims Hooks

• Current account = goods + services + income + transfers. FDI, FPI and loans go into the capital/financial account.
• Remittances count as secondary income in the current account. For India they were US$ 55.5 billion in H1 2024-25 [5].
• India's current account deficit in H1 2024-25 was US$ 21.4 billion (1.2% of GDP), and reserves rose by US$ 23.8 billion [5].
• Trap: balance of trade strictly counts goods only. Services are invisibles and are counted in the current account of the BoP.
• NCERT: a persistent negative balance means spending more than earning, and it ultimately exhausts financial reserves. India's example is the 1991 crisis.
• Favourable balance: China, Germany, Gulf oil exporters. Unfavourable balance: India, with a merchandise deficit of US$ 282.83 billion in FY 2024-25 [4].

Mains Points

• India's structural goods deficit and how it is covered (GS-III):
• Imports of oil, gold and electronics create a large goods deficit (US$ 282.83 billion in FY 2024-25) [4].
• Services exports and remittances cover most of it, which keeps the current account deficit near 1.2% of GDP (H1 2024-25) [5].

• Policy responses: PLI schemes for electronics, cutting oil imports through renewables, and export promotion.

• BoP and external stability (GS-III):

• A persistent current account deficit drains reserves, as India saw in its 1991 crisis.

• A healthy reserve buffer, such as the US$ 23.8 billion added in H1 2024-25 [5], protects the rupee from shocks like oil price spikes during Middle East conflicts.

• Global imbalances (GS-I/II):

• Large surpluses build up in one place, such as China's US$ 1.19 trillion in 2025 [2], while other countries run deficits.
• This creates trade friction and drives new regional trade blocs.
• Countries that export mainly raw materials face swings in their BoP when prices fall. This argues for value addition and diversification.

Related concepts

• Balance of trade
• Favourable balance of trade
• Unfavourable balance of trade

Read more

• Describing trade: volume, composition, direction and balance