How will the purchase of Rafael planes by India from France be recorded in the balance of payments account?

Debited to the current account

The correct answer is Option (2) → Debited to the current account

The purchase of Rafael planes by India from France is a transaction involving the import of goods. In the balance of payments (BOP) account, imports are recorded as debits in the current account. Therefore, this transaction would be debited to the current account, reflecting the outflow of foreign currency for the purchase of the planes.

There is a common doubt among the students that "Rafales are military assets and hence should be included in the capital account rather than as a regular import. Since, purchase of rafale will increase assets of the country. ". While it's true that Rafale jets are military assets and contribute to the defense infrastructure of the country, the Balance of Payments (BoP) does not classify transactions based on whether the item is a capital or physical asset in the general sense. Instead, it classifies them based on the nature of the transaction—whether it's a trade in goods and services (current account) or a movement of financial capital and investments (capital account). Since the purchase of Rafale jets involves the import of goods from another country, it is recorded as a debit in the current account, just like any other import, regardless of whether the imported good is for civilian or military use. The capital account, by contrast, deals with cross-border investments, loans, and financial transfers, not with the physical import of assets.