Question

Critically evaluate the balance of payment situation in india aince 1991.give your opinion to improve the situation to improve the situation

Answer 1

Hi mate,

Explanation:

Balance of payments

The balance of payments (also known as balance of international payments and abbreviated B.O.P. or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a quarter or a year) and the outflow of money to the rest of the world. These financial transactions are made by individuals, firms and government bodies to compare receipts and payments arising out of trade of goods and services.

The balance of payments consists of three components: the current account, the capital account and the financial account. The current account reflects a country's net income, while the capital account reflects the net change in ownership of national assets.

The balance of payments is important in international financial management for the following reasons:

First, the balance of payments is a factor in the demand and supply of a country's currency. For example, if outflows exceed inflows, then the demand for the currency in the domestic market is likely to exceed the supply in the foreign exchanging market, ceteris paribus. One can thus infer that the currency would be under pressure to depreciate against other currencies. On the other hand, if the inflows exceed outflows, then its currency would be likely to appreciate.

Second, a country's balance of payments data may signal the country’s potential as a business partner for the rest of the world. A country grappling with a major balance of payments difficulty may not be able to expand imports from the outside world. Instead, the country may impose measures to restrict imports and discourage capital outflows in order to improve the balance of payments situation. On the other hand, a country with a significant balance of payments surplus would be more likely to expand imports, offering marketing opportunities for foreign enterprises, and less likely to impose foreign exchange restrictions.

Third, balance of payments data can be used to evaluate the performance of the country in international economic competition. A country that is experiencing trade deficits year after year may be a signal that the country's domestic industries lack international competitiveness.

The balance of payments takes into account payments for a country's exports and imports of goods, services, financial capital, and financial transfers.[1][2] It is prepared in a single currency, typically the domestic currency for the country concerned. The balance of payments accounts keep systematic records of all the economic transactions (visible and non-visible) of a country with all other countries in the given time period. In the BoP accounts, all the receipts from abroad are recorded as credit and all the payments to abroad are debits. Since the accounts are maintained by double entry bookkeeping, they show the balance of payments accounts are always balanced. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items.

When all components of the BoP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down currency reserves or by receiving loans from other countries.

While the overall BoP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BoP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a specific amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. A BoP surplus (or deficit) is accompanied by an accumulation.

One of the three fundamental functions of an international monetary system is to provide mechanisms to correct imbalances.