SUBMITTED BY :- SUBMITTED TO :-

Dr. Anindita Chakraborty

Dhananjay Bhardwaj
Sumit Singh Kharwar
Thirth Raj Nayek
Hemant Khetan
Shubham Kumar
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 DISEQUILIBRIUM IN
BALANCE OF PAYMENTS
Meaning :-

The balance of payments of a country may be expressed through the following

relation:
B=R–P

Here B denotes the balance of payments; R, total receipts; and P, total payments.
Both total receipts and payments can be subdivided into domestic and foreign
receipts and payments. Assuming that domestic receipts and domestic payments are
equal, the balance of payments can be stated as:
B = R f – Pf
• If Rf > Pf, there will be a balance of payments surplus.
• If Rf < Pf, it denotes a deficit in international payments.
• An equality between receipts and payments (Rf = Pf) signifies equilibrium in
international payments.
Disequilibrium in balance of payments is its condition of surplus or deficit.
 DISEQUILIBRIUM IN
BALANCE OF PAYMENTS

• The account of international payments must necessarily be in balance; for every

credit entry there has to be an off-setting debit entry. This seems to be true.
• The account of international payments must necessarily be in balance; for every
credit
• A stateentry there has to be
of disequilibrium of an
theoff-setting
balance ofdebit entry.ofThis
payments seems assumes
a country to be true.
either
the form of a surplus or a deficit. The disequilibrium is said to be favourable
A statethe
• when of difference
disequilibrium of the
between thebalance of payments
autonomous demand of for
a country assumes
and supply of foreign
either the form of a surplus or a deficit. The disequilibrium is said
exchange is positive. On the contrary, a negative difference between the two to be
favourable
denotes an when the difference
unfavourable between the
disequilibrium autonomous demand for and
of payments.
supply of foreign exchange is positive. On the contrary, a negative difference
between
• A balancethe of two denotes
payments an unfavourable
disequilibrium, disequilibrium
whether of payments.
deficit or surplus, has some
impact upon the international economic relations and sustained long term
A balancegrowth
• balanced of payments disequilibrium,
of international trade.whether
But of thedeficit
two, or
thesurplus,
balancehas some
of payments
impactisupon
deficit the international
generally considered as economic relations and
a more disturbing sustained long
phenomenon, term
since the
balanced growth of international trade. But of the two, the balance
burden of adjustment tends often to fall more heavily upon the deficit rather of payments
deficit
than onisthe
generally
surplusconsidered
countries. as a more disturbing phenomenon, since the
burden of adjustment tends often to fall more heavily upon the deficit rather
than on the surplus countries.
 CAUSES OF DISEQUILIBRIUM

ECONOMIC FACTORS

1 Development
activities like
Development establishment
Disequilibrium of industries,
roads bridges,
power plants
etc.

Income of people Increase of

affects aggregate capital goods
demand thereby and Import of
affecting balance consumer goods
of payments. increases.
 CAUSES OF DISEQUILIBRIUM

ECONOMIC FACTORS

2 Cyclical fluctuations cause

disequilibrium in the balance of
Cyclical payments because of cyclical changes
Disequilibrium in income, employment, output and
price variables

Boom and
depression
When prices rise during prosperity and
cause
fall during a depression, a country
disequilibrium which has a highly elastic demand for
conditions. imports experiences a decline in the
value of imports and if it continues its
exports further, it will show a surplus
in the balance of payments.
 CAUSES OF DISEQUILIBRIUM

ECONOMIC FACTORS

Result of increase in import

3 due to high disposable income;
Secular high aggregate demand.
Disequilibrium

Developed countries prefer to import

goods from other countries where
7
goods are produced at lower cost of
production.
 CAUSES OF DISEQUILIBRIUM

ECONOMIC FACTORS Changes in the economy

includes shifts from agriculture
to service, development of
4 alternative source of supply,
Structural exhaustion of productive
Disequilibrium resource, changes in transport
channel and cost.

Structural changes leads to import of

8
capital goods and consumer goods of
the changed structure.
 CAUSES OF DISEQUILIBRIUM

POLITICAL FACTORS

•Political uncertainties, instability, internal

disturbances, war etc.
•Creates threats to industry and investment.
•Contributes to outflow of capital.
•Decline of domestic production; hence import of
goods.
Eg: Sri Lanka, Pakistan etc.
9
 CAUSES OF DISEQUILIBRIUM

SOCIAL FACTORS

• Drop out from existing culture.

• Changes in taste, fashion and preferences of
people.

CONTRIBUTES TO THE INCREASE IN

IMPORTS AND DEFICIT IN BOP.
10
 METHODS OF CORRECTION
OF DISEQUILIBRIUM
Non-Monetary Methods for Correcting Disequilibrium in Balance of Payments

1. Automatic Correction:

Deficit indicates demand of foreign currency is higher and

supply is less.
Corrects automatically as the value of currency fluctuates.

2. Deliberate Measures:

Govt.
11 efforts to correct/ control deficit in BOP. Includes
monetary, trade and miscellaneous measures.
 METHODS OF CORRECTION OF
DISEQUILIBRIUM

3. TARIFFS

Tariffs are duties imposed on imports. When tariffs are imposed, the prices of imports would increase to
the extent of tariff. The increased prices will reduced the demand for imported goods and at the same time
induce domestic producers to produce more of import substitutes. Non-essential imports can be drastically
reduced by imposing a very high rate of tariff.

Drawbacks of Tariffs :-

1. Tariffs bring equilibrium by reducing the volume of trade.

2. Tariffs obstruct the expansion of world trade and prosperity.
3. Tariffs need not necessarily reduce imports. Hence the effects of tariff on the balance of payment
position are uncertain.

4. Quotas

Under the quota system, the government may fix and permit the maximum quantity or value of
a commodity to be imported during a given period. By restricting imports through the quota
system, the deficit is reduced and the balance of payments position is improved.
Types of Quotas :-

1. The tariff or custom quota

2. The unilateral quota
3. The bilateral quota
4. The mixing quota, and
5. Import licensing.

4. Export Promotion

The government can adopt export promotion measures to correct disequilibrium in the
balance of payments. This includes substitutes, tax concessions to exporters, marketing
facilities, credit and incentives to exporters, etc.
The government may also help to promote export through exhibition, trade fairs; conducting
marketing research & by providing the required administrative and diplomatic help to tap the
potential markets.

5. Import Substitution

A country may resort to import substitution to reduce the volume of imports and make it self-
reliant. Fiscal and monetary measures may be adopted to encourage industries producing
import substitutes. Industries which produce import substitutes require special attention in the
form of various concessions, which include tax concession, technical assistance, subsidies,
providing scarce inputs, etc.
 METHODS OF CORRECTION
OF DISEQUILIBRIUM

Monetary Measures:

1. Monetary Policy
The monetary policy is concerned with money supply and credit in the economy. Cash
Reserve Ratio(CRR) and Bank Rate may be raised by the Central Bank.

2. Fiscal Policy

Fiscal policy measure can be taken to reduce prices by imposing new taxes or raising
the rates of existing taxes and to reduce government expenditure.

3. Deflation
Deflation14means falling prices. Deflation has been used as a measure to correct
deficit disequilibrium.
 METHODS OF CORRECTION OF
DISEQUILIBRIUM

4. Devaluation of Currency

Devaluation refers to the attempt made by monetary authorities to bring down the
value of home currency against foreign currency.

5. Exchange Control

It is an extreme step taken by the monetary authority to enjoy complete control

over the exchange dealings. Under this measure, the central bank directs all exporters
to surrender their foreign exchange to the central authority.

6. Encourage Foreign Investment

15
The government induces the foreigners to make an investment in the country offering
them all sorts of investors incentives and concessions. This provides the government
with extra foreign exchanges which are utilized to reduce the deficit in the Balance of
payments.
 INDIA’s EFFORTS TO MAINTAIN BOP POSITION
1. By controlling imports to the country

This is done broadly in the following manner:

This is done broadly in the following manner:
• By reducing the dependency on other countries for different items like food
• By reducing the dependency on other countries for different items like food
grains, cloth, paper, oils, steel, electronic gadgets etc . This can be done by
grains, cloth, paper, oils, steel, electronic gadgets etc . This can be done by
promoting local goods, incentivizing local industries, generating awareness
promoting local goods, incentivizing local industries, generating awareness
campaigns.
campaigns.

• By imposing import duties on good imported to India from other countries.

• By imposing import duties on good imported to India from other countries.
Import duty is a tax collected on imports by the customs authorities of a
Import duty is a tax collected on imports by the customs authorities of a
country.
country.
Depending on the context, import duty may also be referred to as customs
Depending on the context, import duty may also be referred to as customs
duty , tariff, import tax or import tariff.
duty , tariff, import tax or import tariff.
Customs duty is levied as per the value of goods or dimensions, weight and
Customs duty is levied as per the value of goods or dimensions, weight and
other such criteria according to the goods in question. Duty rates in India can
other such criteria according to the goods in question. Duty rates vary from
be ad valorem (as a percentage of value) or specific (rupees per unit). Duty
0% to 150%, with an average duty rate of 11.9%. Some goods are not subject
rates vary from 0% to 150%, with an average duty rate of 11.9%. Some goods
to duty (e.g. laptops and other electronic products).
are not subject to duty (e.g. laptops and other electronic products).
2. By encouraging export of goods through removal of trade obstacles

Thegovernment
The government subsidies
subsidies exporters
exporters and
and insures
insures various
various schemes
schemes for for them.
them.

Twosuch
Two suchschemes
schemesare:
are:

•• MEIS
MEIS (Merchandise Exportsfrom
(Merchandise Exports fromIndia
India Scheme): Objective
Scheme) : Objectiveof of MEIS
MEIS is offset
is to to
offset infrastructural
infrastructural inefficiencies
inefficiencies and associated
and associated costs involved
costs involved in exportin of export
goods and of
goods and which
products, products, which areand
are produced produced and manufactured
manufactured in India. Underin India. Under
this scheme,
this scheme,
Ministry Ministrygives
of Commerce of Commerce givestoduty
duty benefits benefits
several to several
products at 2%, products
3% and 5%
at 2%, 3% and
depending upon5%the
depending upon
product and the product and country.
country.

•• Duty
Duty Draw Back Scheme
Draw Back Scheme :: ItItallows
allowsexporters
exporterstoto get
get a refund
a refund onon customs
customs
duty
duty paid importedgoods,
paid on imported goods, where
wherethose
thosegoods
goods are:
are:to
tobe
betreated,
treated,processed,
processed,
or
orincorporated in other
incorporated in othergoods
goods for forexport.
export.

3. By attracting FDI or Foreign Direct Investment

•• Indian governments for

Indian governments forthe
thelast
lasttwo
twodecades
decadeshave
haveeased
easedFDI
FDInorms
norms across
across
sections
sectionsofofthe
the economy
economyandand tried to improved
tried to improvedthe
theease
easeof
ofdoing
doingbusiness
business
ranking.
ranking.
FDI
FDI inflows
inflows in inIndia
Indiastood
stoodatat$45.15
$45.15bnbninin 2014-15
2014-15 and
and have
have consistently
consistently
increased
increasedsince
sincethen
then growing
growing by by 55%,
55%, from
fromUS$
US$231.37
231.37bn
bninin2008-14
2008-14toto
$358.29
$358.29bn bninin 2014-20
2014-20 ..
4. By liberalizing export policy to encourage exports

• Before 1991, it used to be very difficult for someone to open a company or

• Before 1991, it used to be very difficult for someone to open a company or
a factory of sorts in India. The list of permissions (Licenses) one had to get
a factory of sorts in India. More than 80 government departments were to
from was nearly 80 i.e. more than 80 government departments were to be
be satisfied before a private company could produce something and even
satisfied before a private company could produce something. Even after
after getting appropriate approvals from the government, the government
getting appropriate approvals from the government, the government used to
used to regulate the production activities of these companies.
regulate the production activities of these companies.
• Similarly export business was laden with trade barriers and complicated
• Similarly export business was laden with trade barriers and complicated
regulations. It has become very difficult for the country because all the
regulations. It has become very difficult for the country because all the
required goods and services had to be imported. The import bill of the
required goods and services had to be imported. The import bill of the
country gradually started increasing and has assumed dangerous
country gradually started increasing and has assumed dangerous
proportions.
proportions.
• This resulted in the Balance of Payments crisis which actually meant that
• This resulted in the Balance of Payments crisis which actually meant that
the Import bill was much bigger when compared to income through exports.
the Import bill was much bigger when compared to income through exports.
The foreign exchange reserves of the country touched a new all time low.
The foreign exchange reserves of the country touched a new all time low.
The Government hardly had any money to settle the import bill and
The Government hardly had any money to settle the import bill and
therefore It kick started liberalization of whole national economy along
therefore It kick started liberalization of whole national economy along with
with the export policy.
the export policy.