India’s current account balance saw a far lower surplus of $6.5 billion (0.9% of GDP) in the first quarter compared with a surplus of $19.1 billion (3.7% of GDP) a year earlier.

What is External Sector?

• The external sector is the portion of a country’s economy that interacts with the economies of other countries.
• In the goods market, the external sector involves exports and imports.
• In the financial market it involves capital flows.

Various terminologies related:

[A] Balance of Payment (BoP)

• BoP is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world.
• These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.
• It consists of two components: the current account and the capital account.
• The current account reflects a country’s net income, while the capital account reflects the net change in ownership of national assets.

(1) Current Account

• Current account of BoP consists of all transactions relating to goods, services and income, it is functionally classified into merchandise and
• Current account deficit is the situation where payments on the country are more than the payments into the country.
• In current account surplus, there is a net inward payment into the country on the current.

(2) Capital Account

• The capital account records the net flow of investment transaction into an economy.
• Investments (FDI and FII) and borrowings (ECB) are part of the capital account.

[B] Balance of Trade

• Trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.
• If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
• If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.

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