Q.23 What is the term ‘balance of payment’? Write a note on recent policies regarding BoP management in India.

Ans. Balance of Payment or BoP is the overall statement of a country’s economic transactions with the rest of the world over a period, generally a year. The statement shows receivings from the world and the payments to the world basically shown in the current and the capital accounts. This statement is based on the principles of accounting—similar to the balance sheet of a company. It might turn out to be favourable or unfavourable. If it is unfavourable and the economy is incapable to pay it, this is known as a BoP crisis. In such situations, the IMF remains as the last source of rescue.

• India had to rely on emergency operations from abroad to cope up with periodic BoP crises in 1973, 1979, 1981, and 1991. But after the economic reform process started, the situation started to improve.

As India started ‘opening up’ after 1991, as the part of the external sector reforms, its BoP has become favourable with each succeeding year. Major policies in this direction could be summed up as given below:

(i) Steps in the direction of opening the economy for healthy levels of foreign investments (FIs)—FDI as well as the (FIIs).

(ii) Optimum levels of convertibility to rupee in the current and the capital accounts.

(iii) Accelerated disinvestment of the prospective PSUs, including ‘strategic sale’ to the foreign bidders, too.

(iv) Follow up of LERMS (Liberalised Exchange Rate Mechanism System) in 1992–93.

(v) Modifications in FERA–FEMA

(vi) Prudential management of the financial market with inputs of the required kind of reforms—money market, banking, insurance, stock

markets etc.

(vii) Required kind of trade policy, etc.