Until recently it has been able to maintain a favorable balance of payment position. Though the current account of BOP has consistently been in deficit since 2005-06, it was offset by the surplus in capital account(foreign capital inflows). However since the last few years current account deficit has widened sharply. In 2011-12, CAD was 4.2% of GDP. This deficit has led to sharp pressures on BOP.
Although exports increased after liberalization, the rise in imports was more than the rise in exports. Oil constitutes the major and essential proportion of our import bill. Imports of non-oil products especially gold have also increased due to persistent inflation (absence of such financial instruments in India which can act as a hedge against inflation has led to rise in gold investment).This has contributed to a huge current account deficit. Due to slow GDP growth rate, the capital inflows to India have also slowed down.
The solutions to our BOP problems:-
- We have to boost investors confidence by making our policy environment more predictable. Increase in FDI limit in multi-brand retail(51%) and aviation(49%) is a step in the right direction.
- To be able to pay for our imports we will have to save more and focus on fiscal consolidation. Increase in the price of diesel will not only reduce the burden of subsidies on the govt. but also discourage excessive consumption and hence reduce our oil import bill.
- We have to push our exports and diversify across markets(such as Asia and Africa). This will make our economy resilient to slowdown in the world economy.
- To increase our export competitiveness in the long run ,we will have to reduce cost by improving domestic infrastructure.
- We also have to reduce our dependence on oil imports through more oil and gas explorations in the country.
- Imposing customs duty on gold will only lead to black-marketing. We will have to manage inflation through monetory and fiscal policy.