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Difficulty: Very hardIndustrial Policies, Infrastructure Sector, Balance of Payments, and External Trade

Consider the following statements regarding the accounting classification of external sector transactions in India's Balance of Payments (BoP):

1. Reinvested earnings of foreign direct investment (FDI) enterprises operating in India are recorded under the Primary Income of the Current Account as an income outflow and simultaneously under the Capital/Financial Account as an FDI inflow.
2. Interest payments made by Indian corporates on overseas External Commercial Borrowings (ECBs) are classified under the Capital Account because ECBs themselves represent capital account transactions.
3. Personal remittances sent by Non-Resident Indians (NRIs) to their families in India are recorded under Secondary Income in the Current Account.
4. Foreign currency inflows deposited into Non-Resident External (NRE) bank accounts in India are recorded under Current Account invisibles as private transfers.

Which of the statements given above are correct?

  1. 1 and 3 onlyAnswer
  2. B
    1, 2 and 3 only
  3. C
    1, 3 and 4 only
  4. D
    2, 3 and 4 only

Answer

Statements 1 and 3 are correct.
Statements 1 and 3 are correct. Reinvested earnings of FDI companies are accounted as primary income debit in the current account and an equal FDI equity credit in the capital account. Personal remittances are unrequited current transfers categorized under secondary income. In contrast, interest on foreign debt is a current account primary income item, and NRI deposit accounts represent capital account liabilities.

Step-by-Step Solution

1
Analyze Statement 1 regarding reinvested earnings of FDI enterprises.
In accordance with RBI and IMF BPM6 standards, direct investors' share of retained earnings is debited under Current Account (Primary Income / Investment Income) as if distributed, and credited under Capital Account as reinvested equity FDI inflow.
It reflects both the earning accruing to foreign owners and its immediate reinvestment in the domestic enterprise.
2
Analyze Statement 2 regarding interest payments on External Commercial Borrowings (ECBs).
Interest payment is debt servicing and is classified under Primary Income (Investment Income payout) in the Current Account.
Only principal drawdown and repayment are recorded in the Capital Account under ECBs.
3
Analyze Statement 3 regarding NRI personal remittances.
Unilateral cross-border transfers without any quid pro quo are recorded under Secondary Income (Current Account invisibles).
Remittances do not create any future financial claim or liability.
4
Analyze Statement 4 regarding NRI bank deposit inflows (NRE/FCNR).
NRE bank deposits represent repayable financial liabilities of the banking system and are recorded under Banking Capital in the Capital Account.
They are debt liabilities, unlike unilateral personal remittances.

Key Concept

Classification of Current Account (Goods, Services, Primary Income, Secondary Income) versus Capital Account (FDI, FPI, ECBs, Banking Capital/NRI Deposits) in India's Balance of Payments.
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Topics

Industrial Policies, Infrastructure Sector, Balance of Payments, and External Trade