Sample Essay on Impact of Balance of Payment on Indian Economy

Sample Essay on Impact of Balance of Payment on Indian Economy

Most economies of the world experience a wide range of challenges. Among these challenges is how to balance a country’s economic interaction with the rest of the world. This interaction is commonly expressed in terms of exports and imports. While most countries would want to maintain higher exports than imports, this is sometimes impossible because of cyclic and structural factors that determine economic performance. In this essay, we explore how this balance of trade affects the economy of India.

According, India has a negative balance of payment, which is weighing negatively on the performance of its currency. This has not emerged in 2014 as India has run a current account debt because of its over-dependence on imported goods and services. Throughout history, India has heavily imported gold, technology and energy surpassing the value of what it offers the rest of the world through exports. Consequently, it has brewed a negative balance of trade that threatens the stability of the Rupee. To fund its unhealthy debt, India mostly uses foreign money via stocks and corporate investment, which do not offer a satisfactory solution.

India is further vulnerable to outflows with most investors turning away from young markets. This is because of the anticipation of America’s Federal Reserve to reverse its stimulus programs. Economists contend that India has the lowest foreign exchange reserves of about $280 as compared to other BRICs. This leaves the Reserve Bank of India with limited powers to salvage a falling Rupee. With these limited reserves, a negative balance of payment is imminent for India’s economy.

To deal with this negative balance of payments, India considered an import cover, even though this may cause the reserves to hit the lowest level, equal to the 1996 mark. A safer and healthier option for India would be taking an import cover so that the Rupee takes a hit if a gap exists in the balance of payments. To avoid a crisis like the one that hit the economy in 1991, India uses its gold through pledges to settle bills and services debts. Additionally, the country had to undertake important reforms to avert a looming catastrophe. This was necessary to open the economy and create an environment for international interaction, which is key for the growth of any economy.

Analysts argue that a negative balance of payment for India seems not to be far from being tamed by the government. Early this year, its stocks attracted a net of $2.3 billion in terms of inflows. However, this is not safe as the economy can easily tumble because of deficits in case the trend changes.

It is important to note that India has experienced the problem of the BOP for years in the recent past. For instance, it registered BOP deficits in 2012 and 2009. To be on a safer economic side, India has to service about $178 billion worth of liabilities. These include money borrowed, private debts, and trade credits among others. From this analysis, it is evident that the balance of payment remains an economic threat to India. Of great concern is the country’s deficit and over-dependent on inflows.

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