3.1.2. Balance of Capital Account

♤ It refers to the balance of capital transfers, borrowing and lending from abroad and sales or purchase of stocks of gold and foreign exchange from other countries.

♤ There are two types of capital flows in Capital Account:

o Autonomous Capital Flows: These are ordinary capital flows. These take place because of normal economic considerations like earning of dividends, interests and other incomes by international investment and lending.

o Accommodating Flows: These flows have to be made specifically to bring the BoP into equilibrium.

♤ Balance of Current Account and Balance of Capital Account are interrelated. A deficit on Current Account must be settled by a net surplus on Capital Account. The foreign currency necessary to finance the excess imports must be either borrowed from some other country or to be provided by the government out of its reserves of gold and foreign exchange. Similarly, a surplus in Current Account must be matched by a deficit in the Capital Account.

BoP being the sum total of Balance of Current Account and Balance of Capital Account is always in equilibrium.

3.1.2.1. Foreign Exchange Regulation Act 1973 and Foreign Exchange Management Act (2000)

♤ FERA came into force in 1974.

♤ FERA applied all over India to its citizens. The idea was to regulate all foreign transactions and payments. The legislation focussed on too much control and regulation, thwarting growth and development and was subsequently replaced by Foreign Exchange Management Act (FEMA) in 1999. This was also in consonance with liberalisation policies introduced in 1991.

♤ FEMA was considered to be more liberal in allowing transactions without restrictions, and facilitated international trade. It eased restrictions on cross-border capital flows especially foreign investment.

♤ FEMA covers three areas: