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Question

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

An Indian firm receives investment returns from its foreign subsidiary in the form of profit remittances and also raises long-term commercial loans from an overseas institution. How are these two transactions respectively classified in India's Balance of Payments (BoP) statement?

  1. Profit remittances are recorded under the Current Account as primary income, while long-term foreign commercial loans are recorded under the Capital Account.Answer
  2. B
    Both profit remittances and foreign commercial loans are recorded under the Capital Account as international financial transactions.
  3. C
    Profit remittances are recorded under the Capital Account, whereas foreign commercial loans are recorded under the Current Account as service receipts.
  4. D
    Both profit remittances and foreign commercial loans are recorded under the Current Account under net invisibles.

Answer

Profit remittances are recorded under the Current Account as primary income, while long-term foreign commercial loans are recorded under the Capital Account.
The Current Account of Balance of Payments records trade in goods, services, primary income (such as profits, dividends, and interest), and secondary income (remittances). Profit remittances from overseas subsidiaries are primary income entries under the Current Account. Conversely, External Commercial Borrowings (ECBs) create future financial obligations and alter the country's foreign liability position, making them Capital Account entries.

Step-by-Step Solution

1
Analyze the nature of profit remittances in Balance of Payments accounting.
Profit remittances represent income earned on cross-border capital investments (primary income/invisibles) without altering foreign debt assets or liabilities.
The Current Account records transactions involving exports, imports, net services, and net factor income from abroad (dividends, interest, profits).
2
Analyze the nature of foreign commercial loans (External Commercial Borrowings).
Foreign commercial loans change the financial assets and debt liabilities of domestic residents relative to non-residents.
The Capital Account records all transactions that alter foreign financial assets and liabilities of a nation.
3
Synthesize the accounting classifications to select the matching option.
Profit remittances belong to the Current Account, while commercial loans belong to the Capital Account.
This preserves the standard distinction between current income/spending flows and financial asset/liability creation.

Key Concept

Classification of Balance of Payments (BoP) transactions into Current Account (invisibles/primary income) and Capital Account (external borrowings/investments).
Estimated Time:1m 0s
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Topics

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