UPSC Prelims 2013 Q56: Indian Economy – External Sector & Balance Of Payments
Which of the following constitute Capital Account?
1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment
Select the correct answer using the codes given below.
- (a) 1, 2 and 3
- (b) 1, 2 and 4
- (c) 2, 3 and 4
- (d) 1, 3 and 4
Answer: (b) 1, 2 and 4
Explanation
Items of the Capital Account
| Item | Capital Account? | Reason |
|---|---|---|
| 1. Foreign Loans | Yes | Create a liability to be repaid |
| 2. Foreign Direct Investment | Yes | Changes ownership of assets |
| 3. Private Remittances | No | A transfer; part of the current account (invisibles) |
| 4. Portfolio Investment | Yes | Purchase of shares and bonds by foreign investors |
The two accounts:
| Account | Items |
|---|---|
| Current | Trade in goods, services, income, transfers (remittances) |
| Capital | FDI, portfolio investment, loans, banking capital, NRI deposits |
Rule: if a transaction changes the country's assets or liabilities, it is a capital account item.
India is the world's largest receiver of remittances.
Answer: (b) 1, 2 and 4.
Why each option is right or wrong
- (a) Incorrect. Private remittances are a current account item.
- (b) CORRECT. Foreign loans, FDI and portfolio investment make up the Capital Account.
- (c) Incorrect. Private remittances do not belong; foreign loans are left out.
- (d) Incorrect. Private remittances belong to the current account.
Key point
Capital account: FDI, portfolio investment, foreign loans, banking capital. Remittances are transfers in the current account.
Remember
Capital account = FDI + portfolio + loans.
Common mistakes
- Placing remittances in the capital account.
- Confusing NRI deposits (capital) with remittances (current).
- Forgetting the test: does it create an asset or liability?
Exam tip
Remittance is a gift, not an investment. Gifts go in the current account.
Sources
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)
- Reserve Bank of India — Balance of Payments Manual for India