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Capital Account of India

What is capital account?


Capital account records all capital inflows and outflows of a country and forms part of balance of payment (BoP). It tracks the capital movement for investments and loans into and out of a country. When there is capital account surplus it means a country is receiving more capital inflows. This results in increase in overall increase in BoP, thereby resulting increase in countrys foreign exchange reserves*. Current account deficit is financed by capital account surplus*. Chart below shows annual capital account and current account and overall balance of payment trend in absolute term.
150

Balance of Payment
Capital Acount

125

100

Current A/c
Balance of Payment

75

50

USD Bn

25

0
2001 -25 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013*

-50

-75
* 2013 is till December 2012

-100

Source: RBI

From the above chart, we can see that India has always had a capital account surplus. Capital account has always exceeded current account and been able to finance current account deficit except in the years 2009 & 2012. Although in the years 2009 & 2012, there has been capital account surplus, but it has not been enough to fund the current account deficit resulting in negative BoP.

*Refer to ReWISE on Current account deficit and Rupee Appreciation & Depreciation

Components of Capital account Capital inflows and outflows are classified into foreign investments, loans, banking capital, rupee debt service and other capital. Foreign investment is divided into two components foreign direct investments (FDI) and foreign portfolio investments. FDI refers to foreign investment made in and by India through mergers & acquisitions or setting up new operations while foreign portfolio investments include FII investments in Indian capital market. Loans are further classified into external assistance, commercial borrowings (medium and long term) and short term loan. External assistance refers to loans given to India from foreign government and loans given by India to other foreign government. Commercial borrowings include all medium and long term loans from India through EXIM bank to other countries and loans to Indian companies through FCCB, floating rate notes etc. Short term loans include loans up to 1 year to India for imports directly by overseas supplier. Its components include suppliers credit up to 180 days, buyers credit and suppliers credit greater than 180 days. Banking Capital includes foreign assets and liabilities of commercial banks like NRI deposits, foreign currency holdings etc and movement in balances of foreign central banks and international institutions like Asian Development bank, International Bank for Reconstruction and Development, International Development Association etc. Rupee debt service includes interest payments and principal repayments on account civilian and non civilian debt in respect of Rupee Payment Area. Other capital includes all other capital flows not included above categories like delayed export receipts, quota payments to IMF, Indias subscriptions to international institutions etc. Table below shows net break up of capital account over the years.
FY01 8.8 5.9 3.3 2.6 5.3 0.4 4.3 0.6 -2.0 -0.6 0.3 FY02 8.6 6.7 4.7 2.0 -1.3 1.1 -1.6 -0.8 2.9 -0.5 0.8 FY03 10.8 4.2 3.2 0.9 -3.9 -3.1 -1.7 1.0 10.4 -0.5 0.6 FY04 16.7 13.7 2.4 11.4 -4.4 -2.9 -2.9 1.4 6.0 -0.4 1.7 FY05 28.0 13.0 3.7 9.3 10.9 1.9 5.2 3.8 3.9 -0.4 0.7 FY06 25.5 15.5 3.0 12.5 7.9 1.7 2.5 3.7 1.4 -0.6 1.2 FY07 45.2 14.8 7.7 7.1 24.5 1.8 16.1 6.6 1.9 -0.2 4.2 FY08 106.6 43.3 15.9 27.4 40.7 2.1 22.6 15.9 11.8 -0.1 11.0 FY09 6.8 5.8 19.8 -14.0 8.3 2.4 7.9 -2.0 -3.2 -0.1 -4.0 FY10 53.4 51.2 18.8 32.4 13.3 2.9 2.8 7.6 2.1 -0.1 -13.0 FY11 61.3 38.6 8.3 30.3 28.4 4.9 12.5 11.0 5.0 -0.1 -10.6 FY12 67.8 39.2 22.1 17.2 19.3 2.3 10.3 6.7 16.2 -0.1 -6.9 FY13* 71.6 29.9 15.3 14.6 22.1 1.8 4.5 15.7 20.2 0.0 -0.5

Column1

CapitalAcount (a+b+c+d+e) Foreign investment (a) FDI Portfolio Invesment Loans (b) External Assistance Commercial borrowings Short term Banking capital (c ) Rupee debt service (d) Other capital (e)
in USD( bn), * FY13 till December 2012

Source: RBI

We can see that the capital flows peaked in 2008 to ` 106.8bn and fell to ` 6.8bn in 2009 during the crisis. India capital flow composition has changed over period of time.

Foreign investment component contribution to capital account surplus has increased over years as against loans component contribution except for year 2009. 2009 due to portfolio investment outflows, overall foreign investment flows declined. Foreign investment flows comprised around 60% of capital account in 2012 while loans comprised around 30% of capital account. Portfolio investment flows have been major contributor to overall foreign investments although it has decreased off late. From around 80% contribution to foreign investment flows in 2006 it has fallen to 44% in 2012. Chart below shows sectors attracting highest FDI equity inflows as % of total FDI equity inflows from April 2000 till March 2013 (in terms of USD).
SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS

Metallurgical industries 4% Hotel & Tourism 3%

Power 4%
Services sector* 19%

Automobile industry 4%

Chemicals (other than fertilizers) 5%


Drugs & Pharmaceuticals5%

Construction development 11%

Computer software & Hardware 6%

Telecommunications 7%

* Services sector includes Financial, Banking, Insurance, Non-Financial /


Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis

Source: Department of Industrial Policy and Promotion, RBI

From above chart, it can be seen service sector has attracted highest FDI inflows since April 2000. The above 10 sectors have attracted around 70% of FDI inflows till March 2013.

Chart below shows FII flows in equity and debt from financial year 1993 to 2013.
FII Flows
2,000

Debt

1,500

Equity

1,000

` Bn

500

-500

-1,000

Source: SEBI

From above chart, its seen that FII flows to debt market have only being increased in recent years. Majority of FII flows are into equity market. Except for 1999 and 2009, India has had positive FII equity inflows.

For any further clarification contact mahvash.ariyanfar@idfc.com