Causes of Disequilibrium in Balance of Payment

Disequilibrium in the balance of payments (BOP) occurs when a country’s financial transactions with the rest of the world are not balanced. Here are five major causes:

1. Trade Imbalance

• Explanation: When a country imports more goods and services than it exports, it leads to a trade deficit.
• Example: If India imports $50 billion worth of goods while exporting only $30 billion, it results in a $20 billion deficit.

2. Inflation

• Explanation: High inflation rates can make a country’s exports more expensive and imports cheaper.
• Example: If India’s inflation rises to 8%, foreign goods become more appealing, worsening the BOP.

3. Economic Recession

• Explanation: During a recession, domestic demand for imports may fall, but so does the demand for exports.
• Example: If a recession leads to a 10% decrease in exports, it can create an imbalance.

4. Changes in Exchange Rates

• Explanation: Fluctuations in currency value can affect trade competitiveness.
• Example: A weaker rupee makes imports costlier and can lead to increased BOP deficits.

5. Political Instability

• Explanation: Political uncertainty can deter foreign investment and trade.
• Example: If investors perceive risk, they might withdraw funds, worsening the balance.

Measures to Correct Disequilibrium in India

To address these issues, India employs several measures:

1. Adjusting Interest Rates

• Description: The Reserve Bank of India may alter interest rates to control inflation and stabilize the currency.

2. Import Restrictions

• Description: Imposing tariffs or quotas on certain imports can help reduce trade deficits.

3. Promoting Exports

• Description: Government incentives for exporters can boost foreign sales, improving the BOP.

4. Exchange Rate Management

• Description: Allowing the currency to float can help restore balance by making exports cheaper.

5. Attracting Foreign Investment

• Description: Policies to attract foreign direct investment (FDI) can enhance foreign reserves and improve the BOP.

By implementing these measures, India aims to achieve a more stable balance of payments and foster economic growth.