IGNOU : M.COM : IBO 1 : UNIT 3 : Q - 1. What do you mean by the Balance of Payment Accounting ? Describe various components of the Current Account.

Ans.  Balance of payment is an accounting record of the transactions between the residents of one country and the residents of the rest of the world over a given period of time. Transactions in which domestic residents either purchase assets (goods and services) from abroad or reduce foreign liabilities are considered uses (out flow) of funds because payments abroad must be made. Similarly, transactions in which domestic residents either sell assets to foreign residents or increase their liabilities to foreigners are sources (inflows) of funds because payments from abroad are received.

The Current Account

The structure of the current account in India's BOP statement has been shown. Let us briefly discuss each of the above heads and subheads.

I) Merchandise : Merchandise exports valued on F.O.B.. (Free on board) basis, on private and government account are the credit entries data for these items. They arc calculated from the various documents exporters fill and submit to designated authorities.

 Imports valued at C.I.F. (Cost, Insurance and Freight) are the debit entries. The difference between the totals of credits and debits appears in the 'Net' column. This is the balance on Merchandise Trade Account, a deficit, if negative and a surplus if positive.

ii) Non-Monetary Gold , Movements : Gold is both a commodity and a financial asset. It is treated as a financial assets when it is held by the monetary authority., "Monetization" of gold refers to the transaction when the monetary authority acquires gold, from residents and non residents to add to reserves. This get recorded as a debit entry in reserve account and the off setting credit entry is made in the non monetary gold account. Conversely, when the monetary authority acquires gold demonetization, renew account shows a credit and the non monetary gold movement account shows a debit. Gold imported (or exported) by other agencies form a part of the merchandise trade account. gold movement account shows a debit. Gold imported (or exported) by other agencies form a part of the merchandise trade account.

iii) Invisibles : Credits under 'invisibles' consist of services rendered by residents to non residents, income earned by residents on their ownership of foreign financial I assets (interest, dividends etc.), income earned from the use, by non residents, of non-financial assets such as patents and copy rights owned by residents and the offset entries to the cash and in kind gifts received by residents from non-resident. Debits consist of same items with the roles of residents and non-residents reversed. A few examples may be cited as follows.

·         Receipts in foreign exchange, reported by authorized dealers in foreign exchange, remitted to them by organizers of foreign tourist parties located abroad for meeting hotel and other local expenses of the tourists. This will be a credit under "travel".

·         Freight charges paid to non-resident airlines or shipping companies directly will appear as debits under transportation.

·         Premiums on all kinds of  insurance and re-insurance provided by Indian insurance companies to non-resident clients is a credit entry under "insurance".

·         Profits remitted by the foreign branch of an Indian company to the parent company represent a receipt of 'direct investment income', to be recorded as a credit entry under 'investment income', Interest paid by an Indian company on its borrowings abroad will appear as a debit.

·         Funds received from a foreign government for the maintenance of their embassy, consulates etc, in India will constitute a credit entry under 'Government not included elsewhere'.

·         Foreign exchange earnings of Indian consultancy firms for professional services rendered to non residents will be recorded as a credit entry under 'miscellaneous'. Similarly, professional services provided to residents by non-resident companies will appear as debit entry.

·         Revenue contributions made by the Government of India to international institutions or non-resident entities abroad will be recorded as a debit entry under 'official transfer'. Simply, cash remittances for family maintenance received from Indian nationals working abroad will be a credit entry under private transfers.