Capital Account - Indian Economy
Introduction
All transactions involving capital inflows and outflows that have an impact on a country's international assets and liabilities are recorded in the capital account. It handles all international capital trading operations involving citizens of several nations. It provides a summary of the net inflow of investments into the economy, both governmental and private.
Capital Account: What Is It?
• A country's people' transactions with the rest of the world for a predetermined amount of time, usually a year, are tracked by the balance of payments (BoP).
• The BoP has two primary accounts:
o The current account
o The capital account
• Capital Account: The capital account keeps track of all domestic and foreign exchanges of assets including cash, securities, bonds, and so forth. Included are loans and investments made abroad.
• The capital account monitors capital transfers that directly affect a nation's foreign assets and liabilities.
• All cross-border commerce deals involving nationals of one country and those of other nations are covered.
• The capital account shows how a nation's assets and liabilities have changed hands throughout time.
• The capital account includes banking capital, moveable property, intangible assets, trade credits, borrowings from other countries, FDI and FPI, as well as adjustments to the foreign exchange reserve.
• Along with other things, the capital account contains NRI deposits, SDRs, and money kept abroad.
• Current account surpluses and deficits are financed and absorbed through the capital account.
• Since the capital account deals with financial transfers, the output, revenue, or employment of the country are unaffected.
• A capital account surplus indicates that money is coming into the nation, whereas a deficit indicates that it is leaving.
Balance On The Capital Account's
• The balance on the capital account is determined by the net value of all the credits and debits.
• A surplus in the capital account, which denotes a net influx of capital into the nation, results when the credit items exceed the debit items.
• A deficit in the capital account, which denotes a net outflow of capital from the country, results when the debit items exceed the credit ones.
• India often has a capital account surplus because a significant portion of foreign investments are made there.
The Importance of The Capital Account
• The capital account of a nation reveals whether that nation is importing or exporting capital.
• A country's appeal to foreign investors can be seen in large capital account changes.
• An analysis of a current account can have a significant impact on currency rates.
Components
Foreign direct investment (FDI)
• The capital account is credited when foreign nationals buy Indian capital assets like businesses, industrial complexes, machines, etc. Indian FDI investments abroad are reflected as a debit in the capital account.
Foreign Portfolio Investment (FPI)
• The capital account is credited when foreign residents purchase stocks, corporate bonds, government bonds, and other securities. A debit is made to the capital account whenever an Indian resident buys equities or bonds abroad.
External Commercial Borrowings
• It involves financial transactions involving businesses or people in the private sector as well as government borrowing from other nations.
• The capital account is credited with the income from abroad, such as loan repayments from foreign nationals.
• For financial transactions involving lending to other nations by private sector businesses, individuals, and the government, as well as the repayment of loans obtained from foreign nations, the capital account displays a debit.
Foreign Investments
• Since they cause a foreign exchange influx, foreign investments in Indian companies, government bonds, real estate, and other assets are recorded as credits in the capital account.
• Indian citizens' investments in overseas stocks, bonds, and real estate, among other things, are reported as a debit in the capital account since they cause a foreign exchange outflow.
Foreign Exchange Reserves
• The financial assets that a nation's central bank (in India, the Reserve Bank of India) holds are that nation's foreign exchange reserves.
• These reserves function as a financing element in the balance of payments.
• In the capital account, any withdrawal from the foreign exchange reserves is recorded as a credit, whilst any addition to the reserves is indicated as a debit.
• Instead of displaying actual foreign currency reserves, the BOP account displays foreign exchange reserve movements.
External Assistance
• The term "borrowings as external assistance" describes borrowing by a nation for the benefit of another nation. Compared to what is offered on the open market, it has a lower interest rate.
• Various multilateral organizations, including the World Bank Group, Asian Development Bank, European Investment Bank, New Development Bank, etc., provide aid to India on the international front.
• According to Budget 2022-2023, India received a net of Rs. 71,931 crores in foreign aid.
Capital Accounts Deficit
• A capital account deficit is incredibly uncommon.
• It denotes a net outflow of investment capital as domestic institutions and private citizens increase their holdings of assets with a foreign exchange value.
• This occurs as a result of investors pulling out short-term funds as a result of the world economic crisis.
Conclusion
The balance of payments cannot indicate the health of an economy, regardless of whether there is a capital account surplus or deficit, but it can indicate how well inflows and outflows are balanced. Since the RBI can cover the Capital Account Deficit with internal or external commercial borrowings, it doesn't provide a clear picture of the economy. The current account of the Balance of Payment reflects the actual situation.