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Capital Account covers

It includes capital flows from rest of world

minus

Capital flows to rest of world

 

These include Transactions between Residents and Rest of World

which causes change in asset/liability status

of government or Residents

Example 4 - Capital Account - Teachoo.JPG

Capital flows transactions may be of form Deposits, Borrowings or Investment

Different  Types of  Capital Account Transactions - Teachoo.JPG

Example of Capital Account Transactions

Borrowings are of following 2 types

  1. External Assistance
    It includes loan taken from foreign governments

  2. External Commercial Borrowings
    It includes Borrowings from Foreign Banks or other institutions
    These borrowings may be of govt or of private sector

What is External Assistance - Teachoo.JPG

Example How to Calculate External Assistance - Teachoo.JPG

What are External Commercial Borrowing - Teachoo.JPG

Example  External Commercial Borrowings Calculation - Teachoo.JPG

Difference between External Assistance and External Commercial Borrowings - Teachoo.JPG

Investment is of following types

Foreign Direct Investment

Investment Made by person in foreign country like

(Setting up of business/factory in foreign country)

 

Portfolio Investment

Investing in shares of Foreign Countries or purchase of bonds of foreign country.

It may also include Investment in Real estate or other assets of foreign country

 

Different Types of Investments(FDI and FII) - Teachoo.JPG

How to Calculate Net investments - Teachoo.JPG

Note-We bifurcate Net Investment into FII and FDI - Teachoo.JPG

Deposits are of following 2 types:

Non Residents may hold deposits in Indian Banks in various accounts like

NRO Account, NRE Account, FCNR Account

Similarly Indian Investor may hold deposit in Foreign Account

 

What is Net Capital Flow?

It means

capital flows from rest of world

minus

Capital flows to rest of world

 

If net capital balance is positive, it means there is capital surplus

If net capital balance is negative, it means there is capital deficit

 

Note

A current Account deficit is financed by Net Capital flows

 

NCERT Questions

No questions in this part

Other Books

Question 1

In the following questions, select the correct answers:

Import of Machinery' is recorded in the ____ account and 'Borrowings from abroad'

is recorded in the ___ account.

  1. Current, Capital
  2. Capital, Current
  3. Current, Current
  4. Capital, Capital
View Answer

Question 2

A company located in India receives a loan from a company located abroad.

How is this transaction recorded in India's BOP account?

  1. Credit side of Current Account
  2. Credit side of Capital Account
  3. Debit side of Current Account
  4. Debit side of Capital Account
View Answer

Oswaal Questions

Question 1

An Indian real estate company receives rent from Google in New York.

This transaction would be recorded on ______________ side of _____________ account.

  1. credit, current
  2. debit, capital
  3. credit, capital
  4. debit, current
View Answer

Question 2

A company located in India receives a loan from a company located abroad.

How is this transaction recorded in India's Balance of Payments Account?

  1. Credit side of current account
  2. Debit side of current account
  3. Credit side of capital account
  4. Debit side of capital account
View Answer

 

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Transcript

Example 4 - Capital Account A Indian citizen invest in Shares of US Companies Indian Investor Google Company This is an Investment for Indian person This increases Assets of Indian Citizen so it is included in Current Account Different Types of Capital Account Transactions Investment Borrowings Deposits Example Investment made by Indian investors in foreign assets Investment made in India by foreign investors Example Loan taken by Indian business from foreign banks Example Indian Deposits Funds in Foreign Banks Non Residents depositing funds in Indian Banks Different Types of Investments (FDI and FII) Foreign Direct Investment (FDI) It means Setting up a New business in Foreign Country (Establishing Factory, Shop, Office) It is less liquid (Amount invested cannot be withdrawn easily) It is more beneficial to the country where investment made as it generates employment Portfolio Investment (FII) It means Purchasing Shares of Foreign Companies Investing in Assets (Deposits, Land) etc of Foreign Countries It is more liquid (Amount invested can be withdrawn easily) It is less beneficial to the country where investment made as no new employment generated How to Calculate Net investments It is difference between Investment Received and Investment Made Example Purchase of Shares in US Companies Shares by Indian Investors Purchase of land in USA by Indian Citizen Adani India purchased coal mines in Australia Investment in Indian Stock Market by Dubai Investors Amt invested in Bullet Train Project by Japan Amount 1000 1500 200 3000 4000 Particular Investment Made Less Investment Received Net Investment Amount 7000 (3000+4000) 2700 (1000+1500+200) 4300 Note-We bifurcate Net Investment into FII and FDI Particular Investment Made Less Investment Received Net Investment Out of which FDI (net) Portfolio (net) Total Amount 7000 (3000+4000) 2700 (1000+1500+200) 4300 3800 (4000-200) 500 (4000-200) 4300 Difference between External Assistance and External Commercial Borrowings External Assistance It includes loan taken from foreign governments Note This loan Is not for Commercial purpose (Taken by Govt) External Commercial Borrowings It includes Borrowings from Foreign Banks or other institutions Note This loan Is for Commercial purpose (Taken by Govt or Private Sector) What is External Assistance EXTERNAL ASSISTANCE Foreign country Help or Aid It refers to help/aid received by one state to another state Important Points This loan is not for commercial purpose It is for helping different countries at time of financial crises or in case of calamity It is given by one govt to another (not business) We calculate Net External Assistance Aid /Assistance Received less Aid/Assistance Given Example How to Calculate External Assistance Loan given by Indian Govt to Afghanistan Govt for Infrastructure Development Loan received by Indian Govt from USA Govt for Covid Relief Answer Aid /Assistance Received less Aid/Assistance Given External Assistance (net) 7000 8000 8000 7000 1000 Note- We calculate Net EA Aid Received less Aid Given What are External Commercial Borrowing EXTERNAL COMMERCIAL BORROWINGS Foreign country Business purpose Loan It refers to commercial loans taken by Residents from Non Residents Important Points This loan is for business purpose (and not foreign aid) This loan is normally taken by industries and companies These loans may be short term or long term Example – External Commercial Borrowings Calculation Loan by EXIM Bank India to Foreign Companies Loan to Indian Companies by Foreign Banks Answer Loan Received less Loan Given External Commercial Borrowing 5000 6000 6000 5000 1000 Note- We calculate Net ECM Loan Received less Loan Given

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