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This means that money is flowing into the country. This can be both good and bad. It is good when money is flowing in the country due to FDI and other investments. This is bad when money is flowing in due to 1) Borrowing by govt or other private companies 2) sale of foreign assetts
Deficit in Capital Account This means that money is flowing out of the country. Again, this can be both good and bad. it is good when money is flowing out due to purchasing of foreign assetts. It is bad, when capital is fleeing the country
1. Capital is fleeing the country, due to several reasons like:-
- political instability/ loss of political self confidence - unpredictable business environment in the country, after the highest judicial body cancelled 2G licenses - Rating Agency's have rated India as volatile, downgrading it to as low as "NEGATIVE" from "INVESTMENT GRADE" - Govt's policy initiatives on the front of Genral Anti-Avoidance Rules
2. The above has led to depreciation of Rupee, to as low as Rs. 55 which is having its own problems!
In addition: Due to global economic situation, there is "capital flight"(herding) of FIIs(fair weather friend) to USA. India is not in capital account deficit but the challenge is to meet the current account deficit which is at present aprrox. 2.5% of GDP. HUGE !! India is worried because: 1. Required capital in terms of FDI is not coming due to various reasons explained by Rajeev. 2. Capital flight of FIIs.
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Comments
Capital Account roughly =
Change in foreign ownership of domestic assets - change in domestic ownership of domestic assetts
Thus, Capital Account = Sum of FDI + Portfolio Investment
This means that money is flowing into the country. This can be both good and bad. It is good when money is flowing in the country due to FDI and other investments. This is bad when money is flowing in due to 1) Borrowing by govt or other private companies 2) sale of foreign assetts
Deficit in Capital Account
This means that money is flowing out of the country. Again, this can be both good and bad. it is good when money is flowing out due to purchasing of foreign assetts. It is bad, when capital is fleeing the country
1. Capital is fleeing the country, due to several reasons like:-
- political instability/ loss of political self confidence
- unpredictable business environment in the country, after the highest judicial body cancelled 2G licenses
- Rating Agency's have rated India as volatile, downgrading it to as low as "NEGATIVE" from "INVESTMENT GRADE"
- Govt's policy initiatives on the front of Genral Anti-Avoidance Rules
2. The above has led to depreciation of Rupee, to as low as Rs. 55 which is having its own problems!
Hence govt is worried on account of these issues.
In addition:
Due to global economic situation, there is "capital flight"(herding) of FIIs(fair weather friend) to USA. India is not in capital account deficit but the challenge is to meet the current account deficit which is at present aprrox. 2.5% of GDP. HUGE !!
India is worried because:
1. Required capital in terms of FDI is not coming due to various reasons explained by Rajeev.
2. Capital flight of FIIs.
Meanwhile, the PM today junked the General Anti Avoidance Rules that the ex- FM had proposed to reverse the same, @jmmeena
btw is it junked or just deferred by 1 year?