UPSC Prelims 2013 · Question 6 of 99
UPSC Prelims 2013 question on Capital Account Components
- ExamUPSC CSE
- Year2013
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeDirect
Which of the following constitute Capital Account?
1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment
Select the correct answer using the codes given below:
Show answer
Answer: B. 1, 2 and 4
Verdict
Correct Answer: 1, 2 and 4
Analysis
According to the official UPSC Answer Key for Prelims 2013 General Studies Paper, the correct option is 1, 2 and 4.
The capital account of the Balance of Payments records transactions that change ownership of financial assets and liabilities between residents and non-residents.
Statement by statement
1. Foreign Loans — Correct
Foreign loans create a future repayment liability for the country.
Since they affect financial liabilities, they are recorded in the capital account.
Examples include external commercial borrowings and sovereign loans.
2. Foreign Direct Investment — Correct
FDI involves long-term investment by a foreign entity in a domestic enterprise.
It usually includes lasting interest and some degree of control or influence.
Since it represents investment capital inflow, it is part of the capital account.
3. Private Remittances — Incorrect
Private remittances are money transfers sent by migrants to their families.
They do not create asset ownership or future liability.
They are recorded in the current account as unilateral transfers under invisibles.
4. Portfolio Investment — Correct
Portfolio investment includes investment in financial assets such as shares and bonds.
It does not involve direct management control like FDI.
Since it changes ownership of financial assets, it is part of the capital account.
Extra UPSC info
* Current account includes trade in goods, trade in services, income and transfer payments.
* Capital account includes FDI, FPI, external loans, NRI deposits and banking capital.
* Foreign loans are debt-creating capital flows.
* FDI is generally more stable than portfolio investment.
* Portfolio investment is often called “hot money” because it can move quickly in and out of the economy.
* Do not confuse private remittances with NRI deposits; remittances are current account items, while NRI deposits are capital account items.
How to crack it
Foreign loans, FDI and portfolio investment are capital account items, while private remittances belong to the current account.