| Consider the following statements. |
| 1. India's current account has been negative in most of the years |
| 2. India's foreign exchange reserves are increasing due to surplus in capital account |
| Which of the statements is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :
[c] India has been recording sustained trade deficits since 1980 mainly due to the high growth of imports, particularly of crude oil, gold and silver. In recent years, the biggest trade deficits were recorded with China, Saudi Arab, Iraq, Switzerland and Kuwait. India records trade surpluses with US, Singapore, Germany, Netherlands and United Kingdom. Capital account can be regarded as one of the primary components of the balance of payments of a nation. It gives a summary of the capital expenditure and income for a country. A capital account deficit shows that more money is flowing out of the economy along with increase in its ownership of foreign assets and vice-versa in case of a surplus. The balance of payments contains the current account (which provides a Summary of the trade of goods and services) in addition to the capital account which records all capital transactions. The capital expenditure and income is tracked by way of funds in the form of investments and loans flowing in and out of an economy. This account comprises foreign direct investments, portfolio investments, etc. It gives a summary of the net flow of both private and public investment into an economy.
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