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INDIAN ECONOMY > 27.Foreign Trade and Foreign Investments (Part 2) > Flashcards

27.Foreign Trade and Foreign Investments (Part 2) Flashcards

1
Q

What is the Capital Account?

A

The Capital Account is a record of the inflows and outflows of capital that directly affect a nation’s foreign assets and liabilities.

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2
Q

What types of transactions are included in the Capital Account?

A

The Capital Account includes transactions other than the import and export of goods and services, factor income, and financial transfers.

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3
Q

What is the significance of the Capital Account?

A

The Capital Account reflects the flow of capital between a country and the rest of the world, including foreign investments, borrowing, and other financial transactions.

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4
Q

What are the components of the Capital Account?

A

The components of the Capital Account include External Commercial Borrowing (ECBs), external assistance received by the government, foreign investment (FDI/FII), and banking capital.

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5
Q

What is External Commercial Borrowing (ECBs)?

A

External Commercial Borrowing refers to funds borrowed by entities in a country from sources outside the country’s borders, typically in the form of loans, bonds, or other debt instruments.

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6
Q

What does foreign investment (FDI/FII) refer to?

A

Foreign investment refers to investments made by foreign entities in a country, either through Foreign Direct Investment (FDI) or through Foreign Institutional Investment (FII) in the stock market.

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7
Q

What is banking capital in the context of the Capital Account?

A

Banking capital refers to the capital flows related to the banking sector, including investments made by foreign banks in a country’s banking system or by domestic banks abroad.

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8
Q

How do capital account transactions affect a country’s foreign assets and liabilities?

A

Capital account transactions directly impact a country’s foreign assets and liabilities by influencing the flow of funds into and out of the country, affecting its overall economic and financial position.

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9
Q

What are some examples of capital account transactions?

A

Examples of capital account transactions include foreign direct investments, portfolio investments, loans from international financial institutions, and transfers of financial assets between residents and non-residents.

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10
Q

How is the Capital Account related to the Current Account?

A

The Capital Account and the Current Account are two components of a country’s balance of payments. While the Current Account focuses on trade in goods and services, the Capital Account focuses on capital flows and transactions.

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11
Q

What are External Commercial Borrowings (ECBs)?

A

External Commercial Borrowings are debts taken on by eligible entities in India from external sources for strictly commercial purposes, following the rules and regulations set by the Reserve Bank of India (RBI).

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12
Q

What is the concept of External Assistance Received?

A

External assistance refers to borrowing from foreign countries at concessional rates of interest, typically for development or specific projects.

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13
Q

What is foreign investment in the context of the Capital Account?

A

Foreign investment refers to the investment made by entities from foreign countries in the domestic economy of another country.

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14
Q

What are the two types of foreign investments?

A

The two types of foreign investments are Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI).

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15
Q

What are Foreign Institutional Investors (FII)?

A

Foreign Institutional Investors are entities, such as mutual funds and pension funds, from foreign countries that invest in the financial markets of another country.

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16
Q

What is Foreign Direct Investment (FDI)?

A

Foreign Direct Investment refers to investments made by foreign entities in the production or business operations of a country, involving long-term commitments and control over the invested assets.

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17
Q

How do Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI) differ?

A

FIIs invest in the financial markets, such as stocks and bonds, while FDI involves investments in physical assets, such as factories or infrastructure projects.

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18
Q

What role do FIIs and FDIs play in the capital account?

A

FIIs and FDIs contribute to the inflow of foreign capital into a country, supporting economic development, job creation, and overall growth of the domestic economy.

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19
Q

What regulations or guidelines govern foreign investment in India?

A

The Reserve Bank of India (RBI) and other regulatory bodies in India have established rules and regulations to govern foreign investment, ensuring compliance, transparency, and national economic interests.

20
Q

How does foreign investment impact a country’s economy?

A

Foreign investment can bring in additional capital, technology, expertise, and market access, contributing to economic growth, employment generation, and overall development of the host country’s economy.

21
Q

What does FDI stand for?

A

FDI stands for Foreign Direct Investment.

22
Q

What is the purpose of FDI?

A

The purpose of FDI is for a foreign company to set up a factory, manufacturing unit, or service providing unit in another country.

23
Q

What distinguishes FDI from other types of foreign investment?

A

FDI involves the establishment of a physical presence in the host country, such as setting up a factory or firm, to manufacture goods or provide services.

24
Q

How would a foreign company invest through FDI?

A

A foreign company would invest by setting up a factory or firm in the host country to engage in manufacturing goods or providing services.

25
Q

What is the nature of FDI?

A

FDI is a long-term investment, as it involves the establishment of a physical presence and ongoing operations in the host country.

26
Q

What are the three types of FDI?

A

The three types of FDI are platform FDI, horizontal FDI, and vertical FDI.

27
Q

What is platform FDI?

A

Platform FDI refers to when companies manufacture goods in a foreign country for the purpose of export.

28
Q

What is horizontal FDI?

A

Horizontal FDI occurs when a company duplicates its operations or work in a foreign country, similar to what it does in its home country.

29
Q

What is vertical FDI?

A

Vertical FDI is when a company manufactures a part or component of a product in a foreign country, which is then integrated into the final product.

30
Q

What are the benefits of FDI for the host country?

A

FDI can bring various benefits, including job creation, transfer of technology and know-how, increased production capacity, improved infrastructure, and access to new markets.

31
Q

How does FDI contribute to economic development?

A

FDI can stimulate economic growth by attracting foreign capital, creating employment opportunities, fostering innovation, and enhancing productivity in the host country.

32
Q

What is FPI?

A

FPI stands for Foreign Portfolio Investments.

33
Q

What is the purpose of FPI?

A

The purpose of FPI is for an investor to invest in the stock market of a foreign country with the intention of making a capital gain and exiting the country.

34
Q

How long-term or short-term is FPI?

A

FPI is considered a short-term investment, as investors aim to make capital gains and leave the country relatively quickly.

35
Q

How is FPI different from FDI?

A

FPI involves investing in the stock market of a foreign country for capital gains, while FDI involves establishing a physical presence and engaging in long-term operations.

36
Q

What is the threshold for foreign investment to be classified as FPI in India?

A

Foreign investment that is less than 10% in Indian companies by foreign investors is categorized as Foreign Portfolio Investments.

37
Q

What is banking capital?

A

Banking capital refers to the foreign assets and liabilities of the banking sector, excluding those of the central bank.

38
Q

What does banking capital include?

A

Banking capital includes foreign assets and foreign liabilities of commercial banks, as well as deposits made by non-residents.

39
Q

How is banking capital relevant in the context of balance of payments?

A

Banking capital is a component of the capital account in the balance of payments, representing the international transactions of the banking sector.

40
Q

What is the significance of banking capital in the economy?

A

Banking capital reflects the international financial activities of commercial banks and their interactions with foreign assets and liabilities, which can have implications for the stability and liquidity of the banking system.

41
Q

What constitutes the Ideal Balance of Payment (BoP)?

A

The Ideal Balance of Payment (BoP) is achieved when both the Current Account and Capital Account are in balance, meaning the BoP is zero.

42
Q

Can the overall Balance of Payment (BoP) be in surplus with a Current Account Deficit (CAD)?

A

Yes, it is possible for the overall BoP to be in surplus even with a Current Account Deficit (CAD) if there are significant capital inflows to offset the CAD.

43
Q

Which account reflects the true health of the economy on the external front?

A

he balance on the Current Account reflects the true health of the economy on the external front, rather than the Balance of Payment (BoP).

44
Q

What does the Balance of Payment account record?

A

The Balance of Payment account records the inflow of foreign exchange on the credit side.

45
Q

What was India’s Balance of Payment in the given years?

A

*2018-19: Deficit of 3.34 Billion
*2019-20: Surplus of 59.49 Billion
*2020-2021: Surplus of 87.28 Billion
*2021-2022: Surplus of 47.50 Billion

INDIAN ECONOMY (35 decks)

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