Question

The growing strength of India’s BoP observed in the post reform period since the crisis of 1991 continued in 2017-2018. This growing strength was in spite of a widening current account deficit to the tune of US dollar 12.5 million that is equivalent to 1.7 per cent of GDP in 20017-2018. Rising foreign investment together with a sharp revival of inflows of nonresident deposits maintained a strong balance in the capital account visà- vis high level of reserves. Given such robust external position R.B.I. had deemed it opportune to revisit the issue of full Capital Account Convertibility. In this scenario, Indian companies hand holdings with international agencies (taxing loans & equity partnership) plans to make huge investments in retails and infrastructure. Also many companies are boosting up their foreign country operations. They are less perturbed about the rising inflation rate, interest rate or the other tight money measures adopted by the Government. This could be due to favorable consolidation exposure and the opportunity in covering their risk in currency future market.

1) What is trade deficit?

2) What according to you would be the reason for India’s growing trade deficit.

3) Discuss the after effect of full capital account convertibility.

4) What are the tight monitory policy measures used in India in the recent past?

Answer 1

1]

Trade deficit is the excess of imports over exports. That is, the country imports more goods and services (in value terms) than it exports.

2]

The reason for India’s growing trade deficit is that while imports have been continuously rising, exports have not been rising the rate expected by the government. For example, against the target exports of $350 billion for 2018-19, only $331 billion in exports was acheived

3]

Full capital account convertibility means that the rupee is convertible into other currencies, or other currencies convertible into the rupee for any capital purpose. That is, conversion can be made for any capital accounts purpose such as foreign investment, interest/dividend payments, sale/purchase of immovable property, sale or purchase of financial assets etc. Currently, the rupee is only partially convertible on the capital account, with some restrictions and limits set by the RBI.With full capital account convertibility, there will be no more restrictions or limits

4]

In the recent past, RBI has kept interest rates high to fight persistently high inflation. Thus, even a slowing economy was not stimulated by lowering interest rates.