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Question

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

Which of the following economic transactions is directly recorded under the Capital Account of India's Balance of Payments?

  1. Acquisition of domestic equity shares by foreign institutional investorsAnswer
  2. B
    Dividend earnings remitted by foreign subsidiaries to domestic parent firms
  3. C
    Export proceeds realized from foreign shipment of information technology services
  4. D
    Expenditure incurred by overseas tourists visiting national heritage monuments

Answer

The acquisition of domestic equity shares by foreign institutional investors is classified under the Capital Account of the Balance of Payments.
The Capital Account records transactions that lead to a change in the stock of foreign financial assets and liabilities of a nation. Purchases of domestic stock market shares by foreign institutional investors represent equity inflows that alter ownership claims, categorizing them under the Capital Account.

Step-by-Step Solution

1
Identify the nature of each transaction in the Balance of Payments framework.
Determine whether the transaction alters foreign financial assets/liabilities (Capital Account) or reflects flows of goods, services, and current income (Current Account).
Balance of Payments accounting strictly separates operational trade/income flows from financial capital transfers.
2
Evaluate foreign equity investments against current account receipts.
Cross-border purchases of equity shares create external liabilities and transfer financial asset ownership, belonging to the Capital Account.
Dividends, service exports, and travel spending are operational income and service flows categorized under the Current Account.

Key Concept

Classification of Balance of Payments components: Current Account versus Capital Account
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Topics

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