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Question

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

Which of the following financial transactions are correctly classified under the Current Account of India's Balance of Payments (BoP)? Select all correct options.

  1. Interest income received by domestic financial institutions on investments made abroadAnswer
  2. Unilateral personal remittances sent by non-resident Indian workers to families in IndiaAnswer
  3. C
    External Commercial Borrowings (ECBs) raised by Indian corporate entities from overseas lenders
  4. D
    Foreign Direct Investment (FDI) equity capital inflows into domestic manufacturing firms

Answer

Interest income received on foreign investments and unilateral personal remittances from non-resident workers are classified under the Current Account.
In Balance of Payments framework, the Current Account covers international transactions in goods, services, primary income (which includes investment returns such as interest, profits, and dividends), and secondary income (which includes personal remittances and unrequited transfers). Therefore, interest income earned from foreign investments and personal remittances received from overseas workers are both current account transactions.

Step-by-Step Solution

1
Identify the sub-components of the Current Account in Balance of Payments accounting.
The Current Account consists of visible trade (goods balance), invisible trade (services balance), primary income (compensation of employees and investment income like interest, profit, dividends), and secondary income (unilateral transfers like remittances, gifts, and grants).
Current account entries reflect net income generated and unrequited transfers that do not directly alter cross-border financial claim liabilities.
2
Identify the sub-components of the Capital Account.
The Capital Account includes foreign direct investment (FDI), foreign portfolio investment (FPI), external commercial borrowings (ECBs), foreign central bank loans, and banking capital (including NRI deposits).
Capital account transactions directly involve changes in international asset ownership or debt liability claims.
3
Evaluate the given choices against BoP accounting classifications.
Interest income on foreign investments (primary income) and personal worker remittances (secondary income) belong to the Current Account, whereas External Commercial Borrowings and Foreign Direct Investment belong to the Capital Account.
Matching each item to its respective BoP category confirms the correct choices.

Key Concept

Distinction between Balance of Payments Current Account (goods, services, primary and secondary income) and Capital Account (FDI, FPI, ECBs, banking capital).
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Topics

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