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Zorluk: OrtaIndustrial Policies, Infrastructure Sector, Balance of Payments, and External Trade

Which of the following international financial transactions is correctly classified under the Capital Account of India's Balance of Payments (BoP)?

  1. Reinvestment of retained earnings by a foreign direct investor into its Indian subsidiaryCevap
  2. B
    Dividend payments made by an Indian enterprise to its overseas portfolio investors
  3. C
    Unilateral personal remittances sent by non-resident Indian workers to their families
  4. D
    Interest payments serviced by domestic corporations on External Commercial Borrowings (ECBs)

Cevap

The reinvestment of retained earnings by a foreign direct investor into its Indian subsidiary is classified under the Capital Account as Foreign Direct Investment (FDI).
The correct choice is the option mentioning the reinvestment of retained earnings by a foreign parent company. According to IMF BoP manual standards adopted by the RBI, foreign direct investment comprises equity capital, reinvested earnings, and intra-company loans. Reinvested earnings are credited as FDI under the Capital Account.

Adım Adım Çözüm

1
Differentiate between Current Account and Capital Account transactions in BoP.
Current Account records trade in goods, services, primary income (interest, dividend, profit), and secondary income (remittances). Capital Account records transactions altering foreign asset/liability stock (FDI, FPI, loans/ECBs, banking capital).
Clear categorization based on Reserve Bank of India (RBI) BoP accounting rules is required.
2
Analyze each option's financial nature.
Dividends, worker remittances, and interest payments on external debts represent income flows and transfers without creating financial claims/liabilities, putting them in the Current Account. Retained earnings reinvested by foreign investors directly increase foreign direct equity holdings in India, which is an FDI inflow under the Capital Account.
Reinvested earnings represent accrued investment capital assigned back into the enterprise, altering financial liabilities/equity.

Anahtar Kavram

Classification of Foreign Direct Investment (FDI) components in the Balance of Payments
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Konular

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