Which of the following is not included in the Capital Account of the Balance of Payments of a country?
- (a)Foreign Direct Investment
- (b)Commercial Borrowing
- (c)Invisibles
- (d)External Assistance
Correct — C, Invisibles. The balance of payments splits into a current account and a capital account. The current account records goods trade plus invisibles, and invisibles is the standard Indian term for services such as software and travel, transfers such as private remittances, and investment income. Those are all payments for something used up now, so they belong on the current side. The other three options are all ways of acquiring or discharging a claim on a future stream, which is what puts them on the capital side: foreign direct investment buys a lasting stake in an Indian enterprise, commercial borrowing creates a debt to be repaid, and external assistance is concessional loan or grant finance from foreign governments and multilateral bodies. India's invisibles surplus, driven by software exports and remittances, is what routinely offsets a large merchandise trade deficit.
- (a)Foreign Direct Investment — A capital account entry — it creates a foreign-owned claim on Indian assets, not a payment for current use.
- (b)Commercial Borrowing — External commercial borrowing creates a repayable liability, so it sits on the capital account; only the interest paid on it shows up in invisibles.
- (d)External Assistance — Concessional loans and grants from foreign governments and multilateral agencies are recorded on the capital account.
The balance of payments is a double-entry record of a country's transactions with the rest of the world over a year. The current account covers merchandise trade and invisibles — services, transfers and income. The capital account covers transactions that change assets and liabilities: foreign investment, loans, banking capital and, in the Indian presentation, external assistance. A current account deficit must be financed by a capital account surplus or by drawing down reserves.
The single test that sorts the four options is whether the entry creates a claim. Invisibles are payment for services rendered or income earned, so nothing outlives the transaction; the other three each leave behind an asset on one side and a liability on the other. Remembering that India's software exports and remittances are 'invisibles' also fixes the term, since those are precisely the earnings that shrink the current account deficit.
- Current account = merchandise trade balance + invisibles (services, transfers, income).
- Capital account = foreign investment (direct and portfolio), external commercial borrowing, external assistance, banking capital and short-term credit.
- Software services exports and private remittances are the two largest items in India's invisibles receipts.
- The rupee has been fully convertible on the current account since India accepted IMF Article VIII obligations in August 1994; capital account convertibility remains partial.
- Treating remittances as capital because money crosses the border — private transfers are a current account entry.
- Placing external assistance in the current account because part of it is a grant.
- Confusing the economist's capital account with the narrow 'capital account' of the IMF's newer presentation, where most of it is the financial account.
As a which-one-is-not item on the components of either account, or as a statements item on how a current account deficit is financed.
Consider the following statements: The Indian rupee is fully convertible I. In respect of Current Account of Balance of Payment. II. In respect of Capital Account of Balance of Payment. III. Into gold. Which of these statements is/are correct?
- (a) I alone
- (b) III alone
- (c) I and II
- (d) I, II and III
Answer(a) I alone
The same current-versus-capital split, tested through convertibility. Knowing which transactions sit on which account is what lets you say the rupee is freely convertible for one of them and not the other.
- practice — not a real PYQ
Which one of the following is an invisible item in India's balance of payments?
- (a)Export of iron ore
- (b)Private remittances from Indians abroad
- (c)Foreign direct investment inflow
- (d)External commercial borrowing
Answer(b) Private remittances from Indians abroad — transfers are an invisibles entry on the current account.
- practice — not a real PYQ
A current account deficit in the balance of payments must be met by
- (a)a capital account surplus or a drawdown of reserves
- (b)a rise in the merchandise trade deficit
- (c)an increase in customs duty collections
- (d)a fall in the invisibles surplus
Answer(a) a capital account surplus or a drawdown of reserves — the accounts must balance overall.