What is the capital account?

A country’s capital account is a statement of the money that enters or goes out of the country on account of investment or borrowing. If an Indian company takes a loan from, say, an American bank, the loan shows up as an entry in the capital account. If a British company invests in a factory in India, this is classified as foreign direct investment (FDI) and shows up in the capital account. When foreigners buy shares in Indian companies their investment shows up as portfolio investment on the capital account. These are examples of inflows of capital. Similarly, there are examples of outward capital flows. For example, when the Tatas purchased Tetley and Daewoo, capital from India went abroad. A key facet of capital account convertibility is where Indian households, and not just firms, are able to buy assets outside the country.

The capital account is about our portfolios. It is where we invest in global assets, and global portfolios invest in Indian assets. It is about foreigners buying Indian shares, bonds, real estate, or giving loans to Indians. Conversely, it is about global diversification for households in India.

How far is India from capital account convertibility?

Currently there are restrictions on the capital account. There are limits to Indian companies borrowing abroad. There are restrictions on foreigners investing in India. For example, in sectors like telecom and media there are limits on the share the foreign partner can hold. Also, only foreign institutional investors can hold shares in Indian companies, not individuals. There are restrictions on the amount an FII can hold.

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