"The Indian economy has witnessed a sharp turnaround during 2023 - 24 with Foreign Direct Investments (FDI) inflows of US $ 70.9 Bn and net Foreign Portfolio Investments (FPI) inflows of US $ 32.4 Bn." (i) Distinguish between the above mentioned economic variables. (ii) In which account of Balance of Payments will the given variables be entered and why ? Explain how Accommodating Transactions differ from Autonomous Transactions.

Question

Accepted Answer

The sharp turnaround in FDI and FPI inflows has significant implications for India's Balance of Payments:

**Impact on Capital Account:**
- FDI inflows of $70.9 Bn are recorded as credit items in capital account
- Net FPI inflows of $32.4 Bn are also credit items
- Total capital inflows of $103.3 Bn create surplus in capital account

**Impact on Current Account:**
- FDI brings in foreign exchange, which can finance current account deficit
- Increased FDI may lead to technology transfer and skill development
- Can boost exports in medium to long term

**Overall BOP Impact:**
- Strong capital inflows improve overall BOP position
- Help maintain stable exchange rate
- Build foreign exchange reserves
- Reduce dependence on external borrowings