1. Conceptual Foundation

Meaning and Purpose

The external transactions of a nation are broadly divided into two foundational balance sheet accounts: the Current Account and the Capital Account. The Current Account records all cross-border transactions involving real economic resources—goods, services, primary factor incomes, and unrequited unilateral transfers—that directly influence national income during the current accounting period without altering cross-border asset or liability stocks. The Capital Account records transactions involving financial transfers, cross-border investments, loans, and banking deposits that alter the international asset and liability position of residents and the state. Together, these two accounts dictate a country's net foreign exchange position, external solvency, currency exchange rate stability, and macroeconomic health.

Importance

In civil services examinations (TGPSC / UPSC), Unit 8.2 is a top-tier, high-yield theme. Questions regularly test:

1. Detailed line-item categorization into the Current Account (merchandise trade, software/IT services, factor income, remittances) versus the Capital Account (FDI, FPI, ECBs, NRI deposits, trade credits).
2. The dynamics of the Current Account Deficit (CAD), its sustainable threshold limits (~2.0%–2.5% of GDP), and its link to the Fiscal Deficit (Twin Deficit Hypothesis).
3. Distinction between Non-Debt Creating Capital Flows (FDI, FPI) and Debt-Creating Capital Flows (ECBs, External Assistance, Short-term Trade Credit).
4. The Arvind Mayaram Committee (2014) classification rules for FDI (>= 10% equity) versus FPI (< 10% equity).
5. The legal and structural framework of Currency Convertibility: Full Current Account Convertibility (achieved August 19, 1994 under IMF Article VIII) versus Partial Capital Account Convertibility.
6. Pre-conditions and recommendations of the S.S. Tarapore Committee I (1997) and Tarapore Committee II (2006) on Capital Account Convertibility.

How Concepts Connect

1. Real Output vs. Financial Claims: The Current Account reflects the net real trade balance and net income earned from or paid to the rest of the world. The Capital Account reflects the financing mechanisms (investments and debt) used to pay for current account gaps.
2. Deficit & Borrowing Link: When a country imports more real goods and services than it exports, it runs a Current Account Deficit (CAD). To pay for this deficit, the country must generate a matching surplus in its Capital Account by attracting foreign equity investments (FDI/FPI) or incurring foreign debt (ECBs/loans).
3. Forex Reserve Impact: If Capital Account net inflows exceed the Current Account Deficit, the excess dollars build up the central bank's Foreign Exchange Reserves. If capital inflows are insufficient to cover the CAD, the country faces a overall BoP deficit, depleting forex reserves.
4. Convertibility Evolution: Unrestricted movement of current account funds is permitted to foster international trade (Current Account Convertibility). However, cross-border movement of capital assets is regulated (Capital Account Convertibility) to protect the domestic banking system and currency from volatile speculative capital flights ("hot money").

                      CURRENT ACCOUNT & CAPITAL ACCOUNT ARCHITECTURE
                                            |
        +-----------------------------------+-----------------------------------+
        |                                                                       |
  CURRENT ACCOUNT (Real Resource Flows)                               CAPITAL ACCOUNT (Financial Claims & Debt)
  (No alteration of asset/liability stocks)                            (Alters cross-border asset/liability stocks)
        |                                                                       |
        +---> Balance of Trade (Visible Merchandise)                            +---> Non-Debt Creating Capital Flows
        |      |---> Merchandise Exports (+)                                    |      |---> Foreign Direct Investment (FDI >= 10%)
        |      |---> Merchandise Imports (-)                                    |      |---> Foreign Portfolio Investment (FPI < 10%)
        |                                                                       |      |---> Depository Receipts (ADR / GDR)
        +---> Balance of Invisibles                                             |
               |---> Non-Factor Services (IT, Travel, Shipping)                  +---> Debt-Creating Capital Flows
               |---> Factor Income (Interest, Dividends, Profits)                      |---> External Commercial Borrowings (ECB)
               |---> Private Transfers (Remittances, Gifts, Grants)                    |---> External Assistance (Bilateral/Multilateral)
                                                                                       |---> Banking Capital & NRI Deposits (FCNR-B, NRE, NRO)
                                                                                       |---> Short-Term Trade Credit (Buyers'/Suppliers' Credit)

Key Terms

1. Current Account: The BoP sub-account measuring net international transfers of real goods, services, primary factor incomes, and unilateral transfers without changing cross-border asset ownership.
2. Capital Account: The BoP sub-account measuring net cross-border flows of financial capital, investments, loans, and banking deposits that alter national financial assets or liabilities.
3. Current Account Deficit (CAD): The condition where total spending on imported goods, services, factor payments, and transfers exceeds total earnings from exports and inflows.
4. Foreign Direct Investment (FDI): Capital investment made by a non-resident entity holding 10% or more of paid-up equity in a listed Indian company (or any equity in an unlisted firm), carrying long-term management control.
5. Foreign Portfolio Investment (FPI): Capital investment in financial securities (stocks, bonds) holding less than 10% of paid-up equity in a listed company, without management control.
6. External Commercial Borrowings (ECB): Commercial market-rate loans raised by eligible domestic corporate entities from non-resident lenders with a minimum average maturity of 3 years.
7. Capital Account Convertibility (CAC): The freedom to convert local financial assets into foreign financial assets and vice versa at market-determined exchange rates without state restrictions.
8. Hot Money: Highly volatile, short-term foreign portfolio capital that flows rapidly in and out of financial markets in pursuit of short-term interest rate differentials or capital gains.
9. FCNR(B) Account: Foreign Currency Non-Resident (Bank) account held by NRIs in foreign currencies (USD, GBP, Euro), where the exchange rate risk is borne by the bank.
10. NRE Account: Non-Resident External Rupee account maintained in Indian Rupees by NRIs using foreign earnings, fully repatriable and tax-exempt in India.

Short Timeline of Convertibility & Capital Account Reforms

1. 1991: LPG Economic Reforms launched; two-step devaluation of the Rupee to address the BoP crisis.
2. 1992: Introduction of the Liberalised Exchange Rate Management System (LERMS) (dual exchange rate system: 40% official, 60% market rate).
3. 1993: Unification of the exchange rate system; transition to a market-determined managed float.
4. 1994 (August 19): India accepted Article VIII obligations of the IMF, establishing full Current Account Convertibility.
5. 1997 (Tarapore Committee I): Recommended a 3-year roadmap for full Capital Account Convertibility; halted due to the 1997 South-East Asian Financial Crisis.
6. 1999: Enactment of the Foreign Exchange Management Act (FEMA), 1999, replacing FERA 1973.
7. 2006 (Tarapore Committee II): Formulated a revised 3-phase roadmap (2006–2011) for fuller CAC; implementation delayed by the 2008 Global Financial Crisis.
8. 2014 (Arvind Mayaram Committee): Established the statutory 10% equity threshold dividing FDI and FPI investments.

2. Complete Core Notes

A. Current Account: Structure, Components & Deficit Dynamics

1. Structure of the Current Account

The Current Account measures the net international inflow/outflow of real economic resources. It is divided into two parts:

1. Merchandise Account (Visible Trade):

   • Covers physical commodities (petroleum, gold, electronics, machinery, textiles, agricultural goods).
   • Merchandise Trade Balance = Merchandise Exports - Merchandise Imports
   • Indian Context: India consistently runs a merchandise trade deficit due to heavy reliance on crude oil, gold, electronic components, and coal imports.

2. Invisibles Account:

   • Covers non-physical economic transactions categorized into three line items:
     • Non-Factor Services: Service exports and imports such as Software/IT/ITES (India's largest service export surplus), Travel, Tourism, Business Services, Financial Services, Transportation, and Communication.
     • Factor Income: Net earnings from productive factors across borders—interest received/paid on foreign loans, dividends received/paid on equity investments, and profit remittances. (India typically runs a deficit in factor income due to debt servicing and profit payouts to foreign investors).
     • Private Unrequited Transfers: One-way transfers made without direct quid-pro-quo, consisting of worker remittances sent by non-residents, personal gifts, and government grants. (India is the world's top remittance recipient at ~$120 billion annually).
   • Net Invisibles = Net Services + Net Factor Income + Net Transfers

2. Current Account Deficit (CAD)

• Definition: Occurs when total current account expenditure (imports of goods, services, factor payments, and transfer outflows) exceeds total current account earnings (exports and transfer inflows).
• Core Formula: Current Account Balance = Trade Balance + Net Invisibles Current Account Deficit = Merchandise Trade Deficit - Surplus in Invisibles

3. Macroeconomic Implications of CAD

1. Sustainable CAD Threshold: The High-Level Advisory Committee on BoP (headed by Dr. C. Rangarajan) recommended maintaining CAD below 2.0% to 2.5% of GDP. A CAD within this range is considered sustainable and easily financed by stable, non-debt capital flows (FDI).
2. Twin Deficit Link: High Fiscal Deficits expand aggregate domestic demand beyond national supply capacity, driving import growth and worsening the Current Account Deficit (Twin Deficits).
3. Currency Depreciation Pressure: A wide CAD increases domestic demand for foreign currencies, leading to Rupee depreciation, higher imported inflation (expensive crude oil), and capital flight.

4. Policy Measures to Contain CAD

1. Export Promotion: Launching schemes like RODTEP, Market Access Initiative, and Export Promotion Missions.
2. Curbing Non-Essential Imports: Hiking customs duties on luxury goods, gold, and non-essential electronics; encouraging import substitution.
3. Attracting Remittances & Services: Offering competitive interest rates on NRI bank accounts and expanding digital service exports.

B. Capital Account: Components & Debt vs. Non-Debt Flows

The Capital Account reflects net changes in national financial claims on the rest of the world. Capital flows are categorized by their financial risk profile into Non-Debt Creating and Debt-Creating flows.

1. Non-Debt Creating Capital Flows

Capital inflows that do NOT create a future debt repayment obligation or interest servicing burden for the host country:

1. Foreign Direct Investment (FDI):

   • Definition (Arvind Mayaram Panel, 2014): Investment by a non-resident entity in 10% or more of the paid-up equity of a listed Indian company, or ANY investment in an unlisted Indian enterprise.
   • Key Features: Long-term physical investment (factories, technology, greenfield projects), bringing managerial control, technological know-how, and employment. Highly stable and non-volatile.
   • Routes: Automatic Route (no prior government/RBI approval required) and Government / Approval Route (approval required from relevant administrative ministry via FIFA portal).

2. Foreign Portfolio Investment (FPI / FII):

   • Definition: Investment by a non-resident in less than 10% of the paid-up equity of a listed Indian company, or investment in corporate/government bonds.
   • Key Features: Short-term financial market investment without management control. Highly liquid and volatile, known as "hot money" due to rapid entry and exit based on global interest rate movements.

3. Depository Receipts (ADR / GDR / IDR):

   • American Depository Receipts (ADR) and Global Depository Receipts (GDR) allow Indian companies to raise equity capital in foreign stock exchanges (New York, London).

2. Debt-Creating Capital Flows

Capital inflows that impose a statutory future debt repayment obligation (principal + interest) on domestic borrowers:

1. External Commercial Borrowings (ECB):

   • Commercial loans raised by eligible Indian corporate entities, PSUs, and NBFCs from recognised non-resident lenders at market interest rates under FEMA regulations.
   • Key Condition: Minimum average maturity of 3 years. Cannot be used for real estate speculation, stock market trading, or land purchase.

2. External Assistance:

   • Concessional bilateral loans from foreign sovereign governments (e.g., Japan/JICA) and multilateral loans from development banks (World Bank, ADB, AIIB). Features lower interest rates and longer repayment tenures.

3. Banking Capital & NRI Deposits:

   • Foreign exchange funds deposited by Non-Resident Indians in Indian commercial banks under specified account schemes.

4. Short-Term Trade Credit:

   • Loans extended by foreign suppliers (Suppliers' Credit) or foreign banks (Buyers' Credit) to fund import transactions for periods up to 1–3 years.

3. NRI Deposit Schemes: FCNR(B), NRE, and NRO

State-regulated bank account options for Non-Resident Indians (NRIs) carry distinct currency, tax, and repatriation rules:

1. Foreign Currency Non-Resident (Bank) Account - FCNR(B):

   • Currency: Maintained strictly in foreign currency (USD, GBP, Euro, Yen, CAD).
   • Exchange Rate Risk: Borne completely by the operating Bank, protecting the NRI depositor from Rupee depreciation.
   • Deposit Type: Fixed deposits only (1 to 5 years maturity).
   • Repatriability & Tax: Principal and interest are 100% fully repatriable abroad; interest income is completely tax-exempt in India.

2. Non-Resident External Rupee Account - NRE:

   • Currency: Maintained strictly in Indian Rupees (INR). Foreign currency remitted from abroad is converted into INR at entry.
   • Exchange Rate Risk: Borne completely by the NRI depositor (if the Rupee depreciates, the foreign currency value declines).
   • Deposit Type: Savings, Current, Recurring, or Fixed deposits.
   • Repatriability & Tax: Principal and interest are 100% fully repatriable abroad; interest earned is completely tax-exempt in India.

3. Non-Resident Ordinary Rupee Account - NRO:

   • Currency: Maintained in Indian Rupees (INR).
   • Source of Funds: Used primarily to manage income earned inside India (rental income, dividends, pension, interest on domestic assets).
   • Repatriability & Tax: Restricted repatriation (capped at USD 1 million per financial year); interest earned is subject to Indian income tax / TDS (at 30% plus applicable surcharge/cess or DTAA treaty rates).

C. Convertibility of Rupee & Capital Account Convertibility (CAC)

1. Meaning of Currency Convertibility

Currency convertibility refers to the statutory freedom granted to domestic residents and foreigners to convert the local currency into foreign exchange (and vice versa) at market-determined exchange rates without state intervention or administrative controls.

2. Current Account Convertibility

• Definition: Unrestricted freedom to buy or sell foreign exchange for transactions conducted on the Current Account (merchandise trade, service payments, education, travel, medical treatment, remittance transfers).
• Status in India: Adopted on August 19, 1994, when India formally accepted Article VIII obligations of the IMF.
• Regulated Exceptions: Under FEMA 1999, convertibility is prohibited for illegal/speculative activities (lottery tickets, gambling, sweepstakes) and subject to threshold limits under the Liberalised Remittance Scheme (LRS) (capped at USD 250,000 per financial year per individual).

3. Capital Account Convertibility (CAC)

• Definition: Freedom to convert domestic financial assets into foreign financial assets (and vice versa) at market-determined exchange rates. It implies unrestricted cross-border capital inflows and outflows (buying foreign real estate, acquiring foreign companies, un-capped market borrowings).
• Status in India: Partial Convertibility. India enforces calibrated, macro-prudential controls over capital outflows, ECB ceilings, FPI debt investment caps, and FDI sector limits to prevent speculative capital flight and currency instability.

4. Tarapore Committees on Capital Account Convertibility

1. Tarapore Committee I (1997):

   • Chaired by former RBI Deputy Governor S.S. Tarapore.
   • Recommended introducing full CAC in three phases (1997–2000), contingent on satisfying strict macroeconomic pre-conditions:
     • Fiscal Consolidation: Reduce Central Fiscal Deficit to 3.5% of GDP.
     • Inflation Control: Mandate inflation targeting between 3.0% and 5.0%.
     • Banking Health: Reduce gross NPAs of commercial banks to 5.0% or less, and lower CRR to 3.0%.
     • External Stability: Maintain adequate foreign exchange reserves and bring the Debt Service Ratio below 20% of export earnings.
   • Outcome: Implementation was deferred due to the outbreak of the 1997 South-East Asian Financial Crisis, which exposed the dangers of premature capital account opening.

2. Tarapore Committee II (2006):

   • Re-appointed in 2006 to lay down a revised roadmap for fuller CAC.
   • Proposed a 3-phase rollout (2006–2011) focusing on progressively raising NRI deposit limits, FPI bond ceilings, and corporate overseas investment limits.
   • Outcome: Implementation was again stalled by the 2008 Global Financial Crisis.

D. Plain-Text Formulas & Equations

1. Balance of Trade (BoT): BoT = Merchandise Exports - Merchandise Imports

2. Current Account Balance (CAB): CAB = Merchandise Trade Balance + Net Invisibles CAB = Merchandise Trade Balance + (Net Services + Net Factor Income + Net Private Transfers)

3. Current Account Deficit (CAD): CAD = Total Current Account Outflows - Total Current Account Inflows CAD (as % of GDP) = (Current Account Deficit in USD / Nominal GDP in USD) * 100

4. Capital Account Balance: Capital Account Balance = Net Foreign Investment (FDI + FPI) + Net External Borrowings (ECB + Loans) + Net Banking Capital (NRI Deposits) + Net Short-Term Trade Credit

5. Overall Balance of Payments (BoP): Overall BoP Balance = Current Account Balance + Capital Account Balance + Errors & Omissions

6. Twin Deficit Identity: Fiscal Deficit (Public Gap) + Current Account Deficit (External Gap) = Private Investment Gap

3. Key Concepts & Distinctions

Table 1: Current Account vs. Capital Account

Table 2: Foreign Direct Investment (FDI) vs. Foreign Portfolio Investment (FPI)

Table 3: Comparison of NRI Deposit Accounts (FCNR-B vs. NRE vs. NRO)

Table 4: Current Account Convertibility vs. Capital Account Convertibility

4. Important One-Liners

1. The Current Account records transfers of real economic resources (goods, services, income, transfers).
2. The Capital Account records cross-border transactions in financial assets and debt liabilities.
3. Merchandise exports and imports represent physical visible trade in the Current Account.
4. India consistently runs a merchandise trade deficit due to heavy crude oil, gold, and electronics imports.
5. Software and IT services form the largest component of India's non-factor service export surplus.
6. Private worker remittances are unilateral transfers recorded under Invisibles in the Current Account.
7. India is the largest global recipient of worker remittances, receiving ~$120 billion annually.
8. Current Account Balance = Merchandise Trade Balance + Net Invisibles.
9. The sustainable Current Account Deficit (CAD) limit recommended by the Rangarajan Committee is 2.0% to 2.5% of GDP.
10. The Twin Deficit Hypothesis describes the co-existence of a high Fiscal Deficit and a high Current Account Deficit.
11. Under the Arvind Mayaram Panel (2014) rules, foreign investment of 10% or more in a listed company is classified as FDI.
12. Foreign investment of less than 10% in a listed company is classified as FPI.
13. Any foreign equity investment in an unlisted Indian company is automatically treated as FDI.
14. Both FDI and FPI are classified as Non-Debt Creating Capital Flows in the Capital Account.
15. FPI is referred to as "hot money" due to its high volatility and rapid liquidation from stock markets.
16. External Commercial Borrowings (ECBs) are market-rate commercial loans raised by Indian firms from foreign lenders.
17. The minimum average maturity period required for raising an ECB under RBI norms is 3 years.
18. External Assistance consists of concessional loans received from bilateral foreign governments or multilateral institutions (World Bank, ADB).
19. NRI deposits under FCNR(B), NRE, and NRO accounts are recorded under Banking Capital in the Capital Account.
20. FCNR(B) deposits are held in foreign currency, protecting the NRI depositor from Rupee depreciation risk.
21. Interest earned on FCNR(B) and NRE accounts is completely tax-exempt in India.
22. NRO accounts are used to deposit income earned inside India (rent, dividends) and are subject to Indian income tax.
23. Repatriation from an NRO account is capped at USD 1 million per financial year.
24. Current Account Convertibility was fully achieved in India on August 19, 1994 under Article VIII of the IMF.
25. The Liberalised Remittance Scheme (LRS) allows resident individuals to remit up to USD 250,000 per financial year abroad.
26. Capital Account Convertibility in India remains partially allowed under regulated FEMA limits.
27. The S.S. Tarapore Committee I (1997) laid down pre-conditions for Capital Account Convertibility, including a 3.5% Fiscal Deficit cap.
28. Implementation of Tarapore Committee I recommendations was halted due to the 1997 South-East Asian Financial Crisis.
29. The Tarapore Committee II (2006) recommended a revised 3-phase roadmap (2006–2011) for fuller CAC.
30. The Foreign Exchange Management Act (FEMA), 1999 replaced the rigid Foreign Exchange Regulation Act (FERA), 1973.

5. PYQ-Based Bits

• Inclusion of Items in Current Account (UPSC 2014, 2020):
  • Current Account includes:
    1. Balance of Trade (merchandise exports/imports).
    2. Non-factor service trade (software, travel).
    3. Factor income (interest, dividends, profit).
    4. Private transfers (remittances, gifts).
  • Exclusion: Loans from foreign governments, FPI, and Special Drawing Rights (SDRs) belong to Capital Account / Reserve assets.
• Inclusion of Items in Capital Account (UPSC 2013, 2020, 2021):
  • Capital Account includes:
    1. Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI).
    2. External Commercial Borrowings (ECB) and Foreign Currency Convertible Bonds (FCCBs).
    3. Non-Resident External (NRE) deposits and FCNR(B) deposits.
    4. Trade credits (Buyers' / Suppliers' credit).
  • Exclusion: Private worker remittances are NOT in the Capital Account (they are Current Account transfers).
• FDI Definition and Characteristics (UPSC 2020, 2021):
  • FDI is investment through equity instruments of 10% or more in a listed company or any equity in an unlisted company.
  • It is largely a non-debt creating capital flow that brings capital, technology, and management expertise without imposing debt-servicing obligations.
• Currency Crisis Immunity Policies (UPSC 2020):
  • Measures providing immunity against global financial crises:
    1. Avoiding reliance on short-term foreign commercial debt.
    2. Maintaining adequate foreign exchange reserves (import cover).
    3. Avoiding full, unrestricted Capital Account Convertibility during volatile market cycles.
• Tarapore Committee Focus (UPSC / State PSCs):
  • S.S. Tarapore Committees (1997 and 2006) were constituted by the RBI specifically to report on Capital Account Convertibility (CAC).

6. analysis.pdf Exam Analysis

• Priority: HIGH (Unit 8.2 is a core conceptual theme tested regularly across civil services external sector papers).
• Frequently Tested Subtopics:
  1. Line-item categorization: Current Account items (goods, services, remittances) vs. Capital Account items (FDI, FPI, ECBs, NRI deposits).
  2. FDI vs. FPI criteria (Arvind Mayaram Panel 10% equity rule, management control, stability).
  3. Current Account Deficit (CAD) dynamics, sustainable limits (2.0%–2.5% of GDP), and Twin Deficit link.
  4. NRI Deposit Accounts comparison: FCNR(B) vs. NRE vs. NRO (currency, tax, exchange risk, repatriation limits).
  5. Currency Convertibility: 1994 IMF Article VIII Current Account Convertibility vs. Tarapore Committee recommendations on Capital Account Convertibility.
• Common Question Patterns: Multi-statement line-item verification MCQs (e.g., "Which of the following constitute the Capital Account?"), cause-and-effect questions on CAD, and structural questions on FDI/FPI differences.
• Factual / Conceptual / Numerical / Statement Tendency: Heavily Statement-Based Conceptual paired with Exact Category Classifications & Percentages (10% Mayaram threshold, 2.0%–2.5% CAD threshold, USD 250,000 LRS limit, USD 1M NRO limit, August 19, 1994 Article VIII).
• Simple Frequency Terms: Current Account vs Capital Account Items (Very Frequent); FDI vs FPI Differences (Very Frequent); CAD & Twin Deficit (Frequent); Capital Account Convertibility & Tarapore Panel (Frequent).

7. Exam Traps

• Confusion: Believing that private worker remittances sent by NRIs belong to the Capital Account because the money enters an Indian bank. → Correct understanding: Remittances are unilateral transfer payments (without quid-pro-quo) and belong to Invisibles in the Current Account. NRI bank deposit schemes (FCNR-B, NRE), however, represent liabilities and belong to the Capital Account.

• Confusion: Assuming that Foreign Portfolio Investment (FPI) creates a debt liability for India. → Correct understanding: FPI is an equity/financial market investment and is classified as a Non-Debt Creating Capital Flow. It carries volatile market risk ("hot money"), but it does not create a fixed debt-servicing liability.

• Confusion: Believing that NRE bank account deposits carry zero exchange rate risk for the NRI depositor. → Correct understanding: NRE accounts are held in Indian Rupees (INR), so the NRI depositor bears the full exchange rate risk. Only FCNR(B) accounts are held in foreign currency where the bank bears the exchange risk.

• Confusion: Assuming India has achieved full Capital Account Convertibility. → Correct understanding: India achieved full Current Account Convertibility on August 19, 1994 (IMF Article VIII). Capital Account Convertibility remains partial, governed by calibrated RBI and FEMA limits.

• Confusion: Believing that an investment below 10% in an unlisted Indian company is treated as FPI. → Correct understanding: Under Arvind Mayaram Committee rules, ANY foreign equity investment in an unlisted Indian company is treated as FDI, regardless of the percentage stake. The 10% rule applies strictly to listed companies.

8. Rapid Revision

1. Current Account: Measures net transfers of real goods, services, factor incomes, and unrequited transfers.
2. Capital Account: Measures net cross-border financial transactions altering foreign asset/liability stocks.
3. Merchandise Trade Deficit: Excess of physical goods imports over physical goods exports.
4. Invisibles Account: Non-factor services (IT/travel), Factor income (dividends/interest), Transfers (remittances).
5. Remittances Leader: India receives the highest global worker remittances (~$120 billion/year).
6. CAD Formula: Merchandise Trade Deficit - Surplus in Invisibles.
7. Sustainable CAD Threshold: 2.0% to 2.5% of GDP (Rangarajan Committee recommendation).
8. Twin Deficit Hypothesis: Co-existence of a high Fiscal Deficit and a high Current Account Deficit.
9. FDI Equity Threshold: 10% or more equity in a listed firm, or any equity in an unlisted firm (Mayaram Panel).
10. FPI Equity Threshold: Less than 10% equity in a listed company (no management control).
11. Non-Debt Capital Flows: FDI, FPI, and Depository Receipts (ADR/GDR).
12. Debt-Creating Capital Flows: External Commercial Borrowings (ECB), External Assistance, NRI Deposits, Trade Credit.
13. ECB Minimum Maturity: 3 years minimum average maturity.
14. FCNR(B) Account: Denominated in foreign currency; bank bears exchange risk; 100% repatriable; tax-exempt.
15. NRE Account: Denominated in INR; NRI bears exchange risk; 100% repatriable; tax-exempt.
16. NRO Account: Denominated in INR; used for domestic Indian income; taxable in India; repatriation capped at $1M/year.
17. Current Account Convertibility: Achieved August 19, 1994 under IMF Article VIII.
18. LRS Limit: Individuals can remit up to USD 250,000 per financial year abroad.
19. Capital Account Convertibility: Freedom to convert local financial assets into foreign financial assets; partially allowed in India.
20. Tarapore Committee I (1997): Recommended 3-phase CAC; halted due to 1997 East Asian Crisis.
21. Tarapore Committee II (2006): Proposed 3-phase CAC roadmap (2006–2011); delayed by 2008 Global Financial Crisis.
22. FEMA 1999: Replaced rigid FERA 1973 to facilitate foreign trade and capital management.
23. Import Cover: Number of months of imports supported by available foreign exchange reserves.
24. Hot Money: Volatile short-term portfolio flows (FPI) seeking quick financial gains.
25. Current Account Surplus: Nation is a net lender to the rest of the world; CAD means nation is a net borrower.