Licchavi Lyceum


Licchavi Lyceum

Write any five major causes that bring disequilibrium in the balance of payment. Describe those measures which are used in India to correct it.

Disequilibrium in the balance of payments (BoP) can arise due to various factors. Here are five major causes of BoP disequilibrium, along with the measures used in India to correct them:

  1. Trade Deficit:
    • Cause: When a country’s imports exceed its exports, it results in a trade deficit. This can occur due to a higher demand for foreign goods and services or a decrease in the competitiveness of domestic industries.
    • Correction Measures: India has implemented several measures to correct trade deficits, including promoting exports through export incentives, trade agreements, and export promotion councils. Import restrictions and tariffs on non-essential items may also be imposed to reduce imports.
  2. Capital Flight:
    • Cause: Sudden outflows of capital from the country, often in response to economic instability, can lead to BoP deficits.
    • Correction Measures: To address capital flight, India’s central bank, the Reserve Bank of India (RBI), implements monetary policies to stabilize the rupee exchange rate and attract foreign investments. Capital controls and measures to enhance investor confidence are also used.
  3. Foreign Debt:
    • Cause: Excessive borrowing from foreign sources can lead to higher debt repayments, causing a BoP crisis.
    • Correction Measures: India manages its external debt through prudent borrowing practices, refinancing, and diversification of funding sources. It also focuses on attracting foreign direct investment (FDI) to strengthen the country’s external financial position.
  4. Decline in Foreign Exchange Reserves:
    • Cause: Rapid depletion of foreign exchange reserves can create BoP difficulties, as it reduces the ability to pay for imports.
    • Correction Measures: India maintains an adequate level of foreign exchange reserves, and the RBI intervenes in the foreign exchange market to stabilize the rupee. Additionally, India may seek financial assistance from international organizations like the International Monetary Fund (IMF) during crises.
  5. Economic Shocks:
    • Cause: Sudden economic shocks, such as a global financial crisis or natural disasters, can disrupt trade and investment flows.
    • Correction Measures: India implements counter-cyclical fiscal and monetary policies to mitigate the impact of economic shocks. It may also negotiate temporary relief measures with trading partners.

To summarize, India employs a combination of policy measures to correct BoP disequilibria. These measures involve maintaining adequate foreign exchange reserves, managing external debt, promoting exports, attracting foreign investment, and implementing appropriate monetary and fiscal policies. The specific measures adopted may vary depending on the nature and causes of the BoP disequilibrium at any given time.