An Indian company receives a loan from a company located abroad. This transaction would be recorded on the ___

Question 42 of 77

Q. An Indian company receives a loan from a company located abroad. This transaction would be recorded on the ________ side of ________ account in India's Balance of Payment. (Choose the correct alternative to fill up the blanks)

(a) Credit, Current

(b) Debit, Current

(d) Debit, Capital

Uttarakhand UbseCBSE Class XII Board 2023MCQ· 1mImportance★★★★★

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Concept understanding — Current Account Deficit

The Current Account Deficit: Spending More Than You Earn, But With a Country

Think of your monthly allowance. If you spend ₹2,000 but only earn ₹1,500, you have a deficit of ₹500. You cover that gap by borrowing from a friend or dipping into savings. A country does the same thing on a massive scale — that's the Current Account Deficit (CAD).

The Everyday Intuition

A country's current account is like its income-and-expenditure diary with the rest of the world. It records three main things:

Goods (exports and imports of physical items — phones, wheat, oil)
Services (IT exports, tourism, shipping)
Transfers (money sent home by workers abroad, foreign aid)

When the total money flowing out for imports, services, and transfers exceeds the money flowing in from exports, services, and transfers, you have a deficit. The country is a net borrower from the world.

Note

A deficit is not automatically "bad." It means the country is consuming or investing more than it produces — which can be fine if the borrowed money goes into productive assets (factories, roads) that generate future income.

The Precise Definition (NCERT Style)

The current account is part of the Balance of Payments (BoP) — the record of all economic transactions between residents of a country and the rest of the world.

\text{Current Account Balance} = (X - M) + (X_{\text{services}} - M_{\text{services}}) + \text{Net Transfers} + \text{Net Income}

Where:

$X$ = Exports of goods
$M$ = Imports of goods
$X_{\text{services}}$ = Exports of services (e.g., Indian IT firms selling software to the US)
$M_{\text{services}}$ = Imports of services (e.g., Indians using Netflix)
Net Transfers = Money received from abroad minus money sent abroad (e.g., remittances from Indians working in the Gulf)
Net Income = Earnings from investments abroad minus payments to foreign investors (e.g., dividends paid to a Japanese company that owns a factory in India)

If this total is negative, the country has a Current Account Deficit.

Why It Matters (The "So What?")

A CAD must be financed. How? By borrowing from abroad or selling assets to foreigners. This shows up on the other side of the BoP — the Capital Account. If a country runs a CAD of $50 billion, it must attract$ 50 billion of foreign investment (FDI, FII, loans) to balance the books.

Three things to watch:

Sustainability — A small CAD (say 2-3% of GDP) is normal for a growing economy like India. A large, persistent CAD (5%+ of GDP) signals trouble: the country is living beyond its means and may struggle to repay.
Currency pressure — To finance a CAD, the country needs foreign currency (dollars). High demand for dollars can weaken the rupee. A weaker rupee makes imports costlier (inflation) but helps exports.
The J-Curve effect — When the rupee depreciates, the trade deficit often worsens initially before improving. Why? Imports are priced in dollars and become more expensive in rupees immediately, while export volumes take time to respond. The graph of the trade balance over time looks like a "J" — dipping first, then rising. …

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A loan received from abroad is a capital inflow that creates a liability for India; it appears on the credit side of the Capital Account because it brings foreign exchange into the country.

The Balance of Payments is a systematic record of all economic transactions between residents of a country and the rest of the world during a given period. It has two main components: the Current Account and the Capital Account.

The Current Account records transactions in goods, services, income (like wages and investment income), and current transfers. Think of it as the account that tracks the flow of real resources and income payments—exports and imports of merchandise, software services, remittances from workers abroad, and so on.

The Capital Account (often clubbed with the Financial Account in modern presentations, but NCERT treats them together as "Capital Account") records transactions that involve financial assets and liabilities—foreign direct investment, portfolio investment, loans, and banking capital. When an Indian company receives a loan from a foreign entity, no goods or services change hands immediately. Instead, the transaction creates a financial liability: the Indian company now owes money to the foreign lender. This is a capital transaction, not a current one.

Now, the credit-debit logic. In Balance of Payments accounting, any transaction that brings foreign exchange into the country is recorded as a credit, and any transaction that sends foreign exchange out is a debit. When the Indian company receives the loan, dollars (or euros, yen, etc.) flow into India. The company can convert this foreign currency into rupees and use it for investment, working capital, or any other purpose. Because foreign exchange is coming in, the transaction is a credit. …

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Q.An Indian company receives a loan from a company located abroad. This transaction would be recorded on the ________ side of ________ account in India's Balance of Payment. (Choose the correct alternative to fill up the blanks)

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Q.An Indian company receives a loan from a company located abroad. This transaction would be recorded on the side of account in India's Balance of Payment. (Choose the correct alternative to fill up the blanks)

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