Balance of payments I: the current account

Detail

1. What the balance of payments is

• Balance of payments (BoP): 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 it.
• 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.

• Because every credit has a matching debit, the BoP 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, covered in this note, and the capital (financial) account, covered in BoP II.

2. The current account: its three parts

• Current account: records (i) trade in goods, (ii) trade in services and (iii) transfer payments.
• It is called "current" because these flows are about income and spending today. They do not create a claim that has to be repaid later.

3. Balance of trade

• Balance of trade (BoT) = value of goods exports − value of goods imports.

• Goods exports are a credit item. Goods imports are a debit item.

• Trade deficit: goods imports are greater than goods exports, so BoT is negative.

• Trade surplus: goods exports are greater than goods imports, so BoT is positive.
• Trap: BoT covers goods only. Services are not part of BoT. They sit in "invisibles".
• India, latest data: the merchandise trade deficit was US$ 337.3 bn in 2025-26, up from US$ 286.9 bn in 2024-25 [2].

4. Invisibles

• Invisibles are services, income and transfers. They are called "invisible" because nothing physical crosses the border or passes through customs.
• Net invisibles = invisible receipts − invisible payments.
• Non-factor services: traded services that are not payments to factors of production (labour, land, capital).
• Examples: shipping, banking, insurance, tourism and software.

• India, latest data: net services receipts were US$ 60.4 bn in Q4 (Jan-Mar) 2025-26, up from US$ 53.3 bn a year earlier [2]. In Q1 2025-26 they were US$ 47.9 bn, up from US$ 39.7 bn [3].

• Income account: net earnings on factors of production.

• Items: compensation of employees (wages), interest, dividends and profits.
• For India this is a net outflow, because foreign investors take home interest and profits.

• Net outgo was US$ 12.8 bn in Q1 2025-26 (Q1 2024-25: US$ 10.9 bn) [3] and US$ 11.1 bn in Q4 2025-26 (Q4 2024-25: US$ 11.9 bn) [2].

• Transfers: receipts for which nothing is given in return.

• Examples: gifts, grants and remittances (money that citizens working abroad send home).
• Personal transfer receipts were US$ 43.5 bn in Q4 2025-26, up from US$ 33.9 bn in Q4 2024-25 [2].

5. The main formula and a worked example

• Current account balance (CAB) = BoT + net invisibles (NCERT Q1).

NCERT Table 6.1 (US$ million)

Item	Value
1. Exports (goods)	150
2. Imports (goods)	240
3. Trade balance	−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 (trade balance): 150 − 240 = −90.
• Step 2 (net invisibles): 30 + (−10) + 32 = 52.
• Step 3 (CAB): −90 + 52 = −38, so there is a current account deficit of 38.
• NCERT error: the table labels the trade balance "[2 – 1]". It should be exports − imports, which is row 1 − row 2 = −90.
• Real India example (2025-26):
• CAB = −25.2 and BoT = −337.3 [2].
• So net invisibles = −25.2 − (−337.3) = about +US$ 312 bn.
• Invisibles covered roughly 93% of the goods gap. This is India's current account story in one line.

6. NCERT terms vs the IMF's BPM6

• NCERT is loose here: Class 12 counts factor income as part of "trade in services".
• BPM6 (the IMF's Balance of Payments Manual, 6th edition, the global standard) uses different labels:
• Factor income is primary income.

• Transfers are secondary income.

• RBI's current account table follows BPM6. It reads: goods, services, primary income, secondary income. RBI press releases use these same labels, for example "personal transfer receipts under secondary income account" [2].

7. Surplus, deficit, lending and borrowing

• Current account surplus: current receipts are greater than current payments. The nation 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 nation is a borrower.
• A CAD must be financed in one of two ways:
• a capital account surplus (foreign investment or loans coming in), or
• running down forex reserves (spending the RBI's stock of foreign currency).

• Example: in 2025-26, India's forex reserves fell by US$ 23.6 bn on a BoP basis [2]. In Q1 2025-26 they rose by US$ 4.5 bn [3].

• Why this matters (link to 1991, keec103):

• Large CADs had been financed by short-term borrowing.
• Forex reserves then fell to a level that could pay for only about two weeks of imports.
• India faced a BoP crisis, devalued the rupee and began the 1991 reforms.

8. The saving-investment identity

• CA = S − I. Here S is national saving and I is domestic investment.
• CAD means I > S. The country invests more than it saves, and foreign savings fill the gap.
• Worked example: GDP = ₹100 lakh crore, S = ₹30 lakh crore, I = ₹32 lakh crore.

• CA = 30 − 32 = −₹2 lakh crore, which is a CAD of 2% of GDP.

• Policy meaning: a CAD is not always bad. If it pays for productive investment, it can help growth. If it pays for consumption or gold, it is riskier.

9. India's structural pattern

• A large, persistent merchandise deficit. The main imports behind it are crude oil, gold, electronics and coal.
• Two things offset it:
• A net services surplus from software, business services and global capability centres (GCCs). GCCs are offshore units of multinational companies located in India.

• Remittances. India is the world's largest remittance recipient, at US$ 135.4 bn in FY25 [4] (NCERT scaffold: about US$ 135 bn).

  • In calendar year 2024 the World Bank estimated India at US$ 129 bn, ahead of Mexico (US$ 68 bn), China (US$ 48 bn), the Philippines (US$ 40 bn) and Pakistan (US$ 33 bn) [5].
  • A growing share of remittances now comes from advanced economies, which reflects more skilled workers abroad [4].
  • Sending money to India costs less than the global average, but still more than the SDG target of 3% (for sending US$ 200) [4].

• CAD figures (RBI):

• 2024-25: US$ 22.9 bn (0.6% of GDP) [2]
• 2025-26: US$ 25.2 bn (0.6% of GDP) [2]

• 2012-13: a record 4.8% of GDP (NCERT scaffold)

• Quarterly swings:

• Q1 2025-26: CAD of US$ 2.4 bn (0.2% of GDP), down from US$ 8.6 bn (0.9%) in Q1 2024-25 [3].
• Q4 2025-26: a surplus of US$ 7.1 bn (0.7% of GDP), compared with US$ 13.7 bn (1.4%) in Q4 2024-25 [2].

• Q4 is often in surplus because services exports and remittances peak in that quarter.

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

10. Sensitivity to oil and gold

• Oil:
• India imports more than 80% of its crude oil.
• So a rise in crude prices raises the import bill directly.

• Each US$ 10/barrel rise is commonly estimated to widen the CAD by about 0.3-0.4% of GDP (verify current).

• Gold:

• Indians buy gold for jewellery and as savings.
• Demand rises when inflation or uncertainty is high, because people see gold as a safe store of value.

• Gold imports then rise and the CAD widens.

• The FY13 episode:

• High oil prices and a boom in gold imports came together.
• The CAD hit a record 4.8% of GDP.
• The government responded by raising the import duty on gold to cut demand.

Prelims Hooks

• Balance of trade covers goods only. Services fall under invisibles, not BoT.
• CAB = BoT + net invisibles. Invisibles = services + income + transfers.
• BPM6: factor income = primary income; gifts, grants and remittances = secondary income.
• Remittances are transfers (secondary income). They are not part of the capital account and not services.
• CA = S − I. A CAD means domestic investment is greater than domestic saving, so the country is a net borrower.
• The BoP always balances in accounting terms because of double entry.
• India's CAD: US$ 22.9 bn (0.6% of GDP) in 2024-25 and US$ 25.2 bn (0.6%) in 2025-26 [2]. The record is 4.8% in 2012-13.
• India is the world's largest remittance recipient: US$ 135.4 bn in FY25 [4]; US$ 129 bn in CY2024 per the World Bank [5].
• NCERT Table 6.1 trap: trade balance = exports − imports (row 1 − row 2) = −90, not "[2 – 1]".
• Primary income is a net outflow for India, because interest and profits go out to foreign investors [2][3].

Mains Points

• The CAD is structural but manageable.
• India's goods deficit was US$ 337 bn in 2025-26, yet invisibles held the CAD to 0.6% of GDP [2].
• This rests on IT and GCC services and on remittances. Both are exposed to global slowdowns, AI automation and migration or visa policy in host countries.

• Diversifying goods exports (electronics under PLI, the Production Linked Incentive scheme) reduces the risk of relying on these two supports.

• Oil and gold are the weak points.

• India imports more than 80% of its crude, so price shocks pass straight into the CAD.
• Policy responses: renewable energy and ethanol blending to cut oil imports; Sovereign Gold Bonds and gold monetisation to cut gold imports.

• The FY13 CAD of 4.8% and the 2013 "taper tantrum" (sharp capital outflows when the US Federal Reserve signalled it would slow its bond buying) show the risk.

• What finances the CAD matters as much as its size (lesson of 1991).

• Stable FDI is safe financing. Volatile FPI and short-term debt are risky.
• In 1991, reserves fell to about two weeks of imports.

• Today India holds large reserves under a managed float. Even so, reserves fell by US$ 23.6 bn in 2025-26 [2], which shows the buffers are actively used.

• S − I lens for GS-III.

• A moderate CAD lets investment run ahead of domestic saving.
• Raising household financial saving and cutting the fiscal deficit narrows the CAD without choking growth.