Which of the following constitute Capital Account? 1. Foreign Loans 2. Foreign Direct Investment 3. Private Remittances 4. Portfolio Investment Select the correct answer using the codes given below.

The correct answer is B (1, 2 and 4). Capital account records cross-border transactions that create or change a country's assets and liabilities. Foreign loans (external commercial borrowings and multilateral or bilateral loans) create external liabilities. Foreign direct investment and portfolio investment create or change external assets and liabilities, so all three belong in the capital account.

Private remittances are wrong. They are unilateral transfers with no creation of an asset or liability, so they sit in the current account, under the net invisibles head (transfers). Remittances from Indian workers abroad are a major item here, which is why they are often confused with capital flows.

• Statement 1 (Foreign loans): correct, a capital account item under loans, including ECBs and NRI deposits.
• Statement 2 (FDI): correct, a long-term investment in productive assets with a lasting interest, recorded under capital account.
• Statement 3 (Private remittances): wrong, these are unilateral transfers in the current account.
• Statement 4 (Portfolio investment): correct, FII flows into equity and debt, recorded under capital account.

The core concept is the balance of payments structure: current account (goods, services, income, transfers) against capital account (investment and loans). It links to Mains GS-III on external sector management, the current account deficit, and capital flow volatility.

Trap: Aspirants mark remittances as capital flows because they look like large money movements. Ask whether the transaction creates an asset or liability. If it doesn't, it is a current account item.