Balance of Payment

India is the fourth largest economy. China has replaced Japan as the second largest economy. THis is mainly because of the Yuan which has been poorly valued compared to the US dollars. Earlier India has been following a protectionism kind of policy towrds economy. But from 1991 the liberalisation process started transforming India into a global power. The privatisation of public sectors was also enhanced thereby bringing about competition between the companies. Many public sector companies have been opened up for the public. The GDP Gross Domestic Product growth of India has been incresing but with the recent recession in 2007 -10 it has slowed down. The inflation is also high. Now we must see what is a Fiscal deficit

The BOP Balance of payment in lay mans terms is the difference between the amount that has been spent in export and the amount that has been spent in import. This difference should be equal to zero. If not then it would result in a deficit. The surplus country will enjoy while the deficit will suffer. The government has to be careful un its trade policies.

Current Account

The current account is the sum of the balance of trade (exports minus imports of goods and services), net factor income (such as interest and dividends) and net transfer payments (such as foreign aid)The current account balance is one of two major measures of the nature of a country's foreign trade. It is called the current account because the goods are consumed in the current period.

Factor income is the sum of the interest from the investment and the remittances from the people living abroad to their families.

Capital Account

Whereas the current account reflects a nation's net income , the capital account reflects net change in national ownership of assets.

Foreign direct investment (FDI) ,

refers to long term capital investment such as the purchase or construction of machinery, buildings or even whole manufacturing plants. If foreigners are investing in a country, that is an inbound flow and counts as a surplus item on the capital account. If a nations citizens are investing in foreign countries, that's an outbound flow that will count as a deficit. After the initial investment, any yearly profits not re-invested will flow in the opposite direction, but will be recorded in the current account rather than as capital.[1]

Portfolio investment

refers to the purchase of shares and bonds. Its sometimes grouped together with "other" as short term investment. As with FDI, the income derived from these assets is recorded in the current account - the capital account entry will just be for any international buying and selling of the portfolio assets.[1]

Other investment

includes capital flows into bank accounts or provided as loans. Large short term flows between accounts in different nations are commonly seen when the market is able to take advantage of fluctuations in interest rates and / or the exchange rate between currencies. Sometimes this category can include the reserve account.[1]

Reserve account.

The reserve account is operated by a nation's central bank, and can be a source of large capital flows to counteract those originating from the market. Inbound capital flows, especially when combined with a current account surplus, can cause a rise in value ( appreciation ) of a nations currency - while outbound flows can cause a fall in value ( depreciation ). If a government ( or if its authorised to operate independently in this area, the bank itself) doesn't consider the market driven change to its currency value to be in the nations best interests', the bank can intervene

Investment is in the capital account but interest from the investment is in the current account.

Trade deficit

http://en.wikipedia.org/wiki/Current_account

http://en.wikipedia.org/wiki/Capital_account