India generally experiences a huge deficit of the balance of payment due to its size. This is all down to the fact that India requires imported technology, machines, and other resources to run its economy successfully. To know about a country’s economic stability and sustainability, the balance of payment is the measure. Thus, it is usually accountable for 1 year. Also, these payments and receipts include outflows and inflows like payments and receipts. So, in terms of the balance of payment, there is a surplus balance of payment and balance of payment deficit.
Importance of Balance of Payment
In terms of the balance of payment, a country has to take care of three types of items. Visible items include various types of physical goods that are imported and exported. While invisible items include all the services whose import and export are not visible.
This includes medical services, transport services, etc. The third one is a capital transfer which is concerned with capital payments and capital receipts. A country can acquire these goods only by accommodating a capital deficit and this deficit is called the balance of payment.
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This can be broken down into the balance of trade, the balance of current account, and capital account. The balance of trade includes exports and imports. The balance of the current account includes the balances of service and remittance, the balance of trade, etc.
While the capital account is mainly investing and borrowing. The capital account of any country includes transactions in terms of financial assets for the long term as well as short term borrowing and lending. The current account is also known as the balance of trade.
This includes private transfer payments like gifts, grants, remittances, etc. It also includes nonfactor trade services like banking software, shipping, etc. While capital account includes commercial borrowings, foreign investment, other flows, rupee debt services, etc.
Important Terms Used
In recent times, in comparison to dollars, rupees has weakened considerably. Thus, it is expected that there will be a rise in remittances as the NRIs take advantage of buying cheaper goods, assets, and services back home in India. The controls on the money are lifted and thus there are greater inflows.
Also, the government has reduced the red tape that is excessive documents required for the process. Furthermore, the interest rates are also high and RBI has increased the amount due to which more amount can be remitted back home.
Equilibrium and Disequilibrium
When the demand and supply of any foreign currency in a country in a given time period is equal, it is termed as ‘Equilibrium position’ in the balance of payment. While a disequilibrium means that the condition is either deficit or surplus.
The surplus in the balance of payment occurs when the total payments are exceeded by the total receipts. Similarly, a deficit occurs when the total receipts are exceeded by total payments.
Practice Questions on Balance of Payment
Q. Which is/are the correct monetary measures to correct the balance of payment?
C. Exchange rate depreciation
D. All of the above
Answer: D. All of the above
Q. Balance of payment always balances itself at the end.
Answer: A. True