Capital Account Definition and Deficit
Capital Account Definition – “A component of Balance of Payment which consists summary of all the capital expenditure and capital receipts of a country.
It is one of the component of Balance of Payment. It consists of all the capital receipts and expenditure of a country. In other words, any transactions that results in transfer of ownership comes under capital account. In addition to this, it consist of net capital flows of both private and public investments in a country. Basically capital account transactions results in change in the assets and liabilities of the residents of a country or the government.
Capital Account of BOP consist of the following items –
Foreign Direct Investment – It consist of two parts foreign direct investment and portfolio investment. The example of FDI is say, Walmart opens up its retail chain in India. On the other hand, portfolio investment consists of money invested by FII’s or funds that the Indian companies raise through issue of ADRs and GDRs.
External Assistance – It consists of the aid that India has given to other foreign countries or the aid received by India from various foreign governments.
Commercial Borrowings – These consists of the loans that EXIM bank has grant to the various countries or government. In addition to this, it also consists of the loan that other governments banks has grant to the country.
Movement in Reserves – It consist of the change in the foreign currency assets that RBI owns or the SDR that government of India is holding at that moment.
Capital Account Example
In order to understand the capital account definition more clearly, let’s have a look over an example.
Say, India buys a patent of producing a special kind of Basmati Rice in its name. Now the benefits of this transaction won’t be observe immediately but after few years. Such type of transaction are part of the capital account of BOP
Related Financial Terms of Capital Account
Capital Account Deficit
When the capital outflow is more than the capital inflow in the country, it is known as capital account deficit. On the contrary, if the capital account inflow are more than outflow, then it is known as capital account surplus. Now the question is how to finance the deficit in capital account? Well the current account surplus is utilize the deficit in the capital account of the Balance of Payment in order to balance both the sides.
