CURRENT ACCOUNT

(i) In the banking industry, a business firms bank account is known ascurrent account. The account is in the name of a firm run by authorisedperson or persons in which no interest is paid by the bank on thedeposits. Every withdrawal from the account takes place by cheques withlimitations on the number of deposits and withdrawals in a single day.The overdraft facility or the cash-cum-credit (c/c Account) facility tobusiness firms is offered by the banks on this account only.

(ii) In the external sector, it refers to the account maintained by everygovernment of the world in which every kind of current transactions isshown—basically this account is maintained by the central banking bodyof the economy on behalf of the government. Current transactions of aneconomy in foreign currency all over the world are—export, import,interest payments, private remittances and transfers.

All transactions are shown as either inflow or outflow (credit or debit). Atthe end of the year, the current account might be positive or negative. Thepositive one is known as a surplus current account, and the negative one isknown as a deficit current account. India had surplus current accounts forthree consecutive years (2000–03)—the only such period in Indian economichistory.

Current account deficit is shown either numerically by showing the totalmonetary amount of the deficit, or in percentage of the GDP of the economyfor the concerned year. Both the data are used in analysis as per the specificrequirement. As per RBI release of April 2014, presently the sustainablelevel of current account deficit for India is 2.5 per cent of the GDP.

CAPITAL ACCOUNT

Every government of the world maintains a capital account, which shows thecapital kind of transactions of the economy with outside economies. Everytransaction in foreign currency (inflow or outflow) considered as capital isshown in this account—external lending and borrowing, foreign currencydeposits of banks, external bonds issued by the Government of India, FDI,PIS and security market investment of the QFIs (Rupee is fully convertible inthis case).There is no deficit or surplus in this account like the current account.

BALANCE OF PAYMENT (BOP)

The outcome of the total transactions of an economy with the outside worldin one year is known as the balance of payment (BoP) of the economy.

Basically, it is the net outcome of the current and capital accounts of aneconomy. It might be favourable or unfavourable for the economy. However,negativity of the BoP does not mean it is unfavourable. A negative BoP isunfavourable for an economy if only the economy lacks the means to fill thegap of negativity.

The BoP of an economy is calculated on the principles of accountancy(double-entry book-keeping)and looks like the balance sheet of acompany—every entry shown either as credit (inflow) or debit (outflow). Ifthere is a positive outcome at the end of the year, the money is automaticallytransferred to the foreign exchange reserves of the economy. And if there isany negative outcome, the same foreign exchange is drawn from thecountry’s forex reserves. If the forex reserves are not capable of fulfilling thenegativity created by the BoP, it is known as a BoP crisis and the economytries different means to solve the crisis in which going for forex help from theIMF is the last resort.

BALANCE OF PAYMENT (BOP)| GS ARTICLES

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