Which of the following constitute Capital Account?Foreign LoansForeign Direct InvestmentPrivate Remi

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2013 UPSC Prelims Economy paper.

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This UPSC Prelims 2013 Economy question has a medium difficulty level and is marked as an important question.

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Question

Which of the following constitute Capital Account?Foreign LoansForeign Direct InvestmentPrivate RemittancesPortfolio InvestmentSelect the correct answer using the codes given below:

Accepted Answer

Correct Answer: B — 1, 2 and 4 (Foreign Loans, FDI, and Portfolio Investment)Step-by-step Solution:The Balance of Payments (BoP) has two main accounts: the Current Account and the Capital Account (sometimes split into Capital Account and Financial Account in modern IMF methodology).Current Account covers: trade in goods (merchandise); trade in services; primary income (factor income — wages, profits, dividends); and secondary income (current transfers — including private remittances from workers abroad).Capital/Financial Account covers: Foreign Direct Investment (FDI); Portfolio Investment (FPI/FII — equity and debt securities); Other Investment (External Commercial Borrowings — ECBs, bank loans, trade credit — which are forms of foreign loans); Reserve Assets (RBI's forex reserve changes).Evaluating each item: Foreign Loans (1) — Capital Account (part of 'other investment' or 'external borrowings'). ✓ FDI (2) — Capital Account (long-term investment in ownership of production facilities). ✓ Private Remittances (3) — Current Account (classified as secondary income/current transfers). ✗ Portfolio Investment (4) — Capital Account (investment in financial assets — stocks, bonds). ✓Key Concept: Balance of Payments structure: Current Account = Goods trade + Services trade + Primary income (interest, dividends, wages) + Secondary income (remittances, grants). Capital/Financial Account = FDI + FPI/FII + Other Investment (loans, trade credit, currency deposits) + Reserve Assets. India's BoP: Current Account — large goods trade deficit; services surplus (IT, BPO); remittances from Indian diaspora (~$100 billion — world's largest recipient); Capital Account — FDI inflows; FPI flows; ECBs. India receives the world's largest remittances (from UAE, USA, Saudi Arabia, UK primarily — Indian diaspora). Remittances are classified as Current Account transfers because they are one-sided transfers (no corresponding obligation to repay or provide ownership). Loans create repayment obligations and ownership — hence Capital/Financial Account.

Which of the following constitute Capital Account?Foreign LoansForeign Direct InvestmentPrivate RemittancesPortfolio InvestmentSelect the correct answer using the codes given below:

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Which of the following constitute Capital Account?Foreign LoansForeign Direct InvestmentPrivate RemittancesPortfolio InvestmentSelect the correct answer using the codes given below:

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