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Question 51 of 77

Q.Identify which of the following will appear on the debit side in the Capital Account of India's Balance of Payments. (A) An Indian sending remittances from England (B) Investing in assets abroad by Indians (C) An American company purchasing shares of an Indian company (D) Export of spices from India

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The Capital Account records international flows of financial assets and liabilities. A debit entry signifies an outflow of foreign exchange from the country. Investing in assets abroad by Indians leads to an outflow of foreign exchange, thus appearing on the debit side of India's Capital Account.

The Balance of Payments (BoP) is a systematic record of all economic transactions between residents of a country and the rest of the world during a specific period, usually a year. It is divided into two main accounts: the Current Account and the Capital Account.

The Capital Account records all international transactions that involve a change in the ownership of financial assets and liabilities. These transactions affect a country's foreign assets and liabilities.

  • Credit entries in the Capital Account represent an inflow of foreign exchange into the country. This happens when foreign entities acquire assets in India (e.g., foreign investment into India) or when India borrows from abroad. These transactions either create a liability for Indian residents or reduce foreign assets held by Indian residents.
  • Debit entries in the Capital Account represent an outflow of foreign exchange from the country. This occurs when Indian residents acquire assets abroad (e.g., Indian investment abroad) or when India lends to foreign entities. These transactions either create an asset for Indian residents or reduce foreign liabilities.

Let's analyze each option:

  • (A) An Indian sending remittances from England: This refers to an Indian living or working in England sending money back to India. Remittances are unilateral transfers, which are part of the Current Account, not the Capital Account. Since this represents an inflow of foreign exchange into India, it would be recorded as a credit in the Current Account.

  • (B) Investing in assets abroad by Indians: When Indians invest in assets abroad (e.g., buying foreign stocks, bonds, real estate, or setting up businesses in other countries), it involves an outflow of foreign exchange from India to acquire these foreign assets. This transaction creates an asset for Indian residents in a foreign country. Therefore, it is recorded on the debit side of the Capital Account. …

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