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

With reference to the structural accounting of India's Balance of Payments (BoP), consider the following international transactions:

1. Profit repatriated by a multinational enterprise operating in India to its corporate headquarters abroad
2. Unilateral financial grants received by India from a foreign sovereign government for disaster rehabilitation
3. Portfolio investment in equity shares of Indian companies by foreign portfolio investors (FPIs)
4. Inward monetary remittances sent by non-resident Indian workers to their resident families

Which of the transactions listed above are categorized under the Current Account of the Balance of Payments?

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

Answer

The transactions classified under the Current Account are 1, 2, and 4 only.
The Current Account of the Balance of Payments records cross-border trade in goods (merchandise), trade in services, primary income (compensation of employees and investment income like profits, dividends, and interest), and secondary income (unilateral transfers such as personal worker remittances and sovereign grants). Profit repatriation by multinational enterprises represents an investment income outflow (primary income debit), while unilateral foreign grants and worker remittances represent transfer credit entries (secondary income). Foreign Portfolio Investment (FPI), by contrast, changes external financial liability holdings and belongs to the Capital/Financial Account.

Step-by-Step Solution

1
Analyze Transaction 1 (Profit Repatriation)
Categorized under Current Account (Primary Income / Investment Income debit entry).
Earnings on cross-border investments, including profit, dividends, and interest, are part of the Primary Income account within the Current Account.
2
Analyze Transaction 2 (Unilateral Foreign Grants)
Categorized under Current Account (Secondary Income / Transfers credit entry).
Government-to-government official grants for assistance or disaster relief represent unrequited transfers without any reciprocal repayment obligation, belonging to Secondary Income.
3
Analyze Transaction 3 (Foreign Portfolio Investment)
Categorized under Capital Account (Financial Account / Foreign Investment).
Transactions in domestic shares, bonds, or financial instruments by foreign investors change the international investment position and financial liability status of the nation, belonging strictly to the Capital Account.
4
Analyze Transaction 4 (Worker Remittances)
Categorized under Current Account (Secondary Income / Transfers credit entry).
Personal transfers sent by non-resident workers to domestic households represent private unilateral transfers, recorded as invisibles under the Current Account.

Key Concept

Balance of Payments (BoP) Account Classification: Current Account vs. Capital Account
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Topics

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