question_answer

India's balance of payments is in disequilibrium. Enumerate some of the factors, which according to you, can be the causes of disequilibrium. What value is affected if the economy is not in equilibrium?

Answer:

India's Balance of Payments (BoP) is in disequilibrium as payments on account of foreign transactions exceed the receipts on account of foreign transactions.              Some of the causes of disequilibrium are enumerated below: (i) Economic Factors (any two) [a] Inflation Changes in price and cost structure of a country's export industries affect the volume of export and the Balance of Payments position. Increase in price due to higher wages and higher prices of raw material makes export costlier and results in deficit in Balance of Payments. [b] Expenditure on Developing Relations Newly independent countries, in order to develop relations with other countries, have to spend huge amount of money on ambassadors, missions, etc. This has adverse relation on Balance of Payments. [c] Import Services Underdeveloped countries import capital and other services from developed countries, his results in deficit in BoP. (ii) Social Fators (any two) [a] Demonstration Effect People of underdeveloped countries imitate the consumption pattern of the people of developed countries leading to an increase in the level of imports. This increase results in a deficit balance in the BoP account. [b] Change in Tastes, Preferences, Fashion and Trends An unfavourable change in tastes and preferences of consumers towards domestic goods lead to a deficit in the BoP account. (iii) Political Factors Political instability of a country has an adverse effect on Balance of Payments of a country. Further, partition or unification of a country also affects the Balance of Payments of a country. Value affected is the value of 'Economic growth' and "Equality".