India’s Balance of Payments Problem: A Monetary Solution

Persistent deficit in balance of payments has remained the chief concern for the planners and policy makers in India since long. It is an acceptable fact that unless India’s BoP position improves and international indebtedness starts falling, all plans of it emerging as a superpower and an affluent country are going to remain on paper. This book analyses the causes of deficit in India’s BoP and suggests long-term solution. The book carries a detailed investigation into India’s BoP since the advent of the British East India Company, identifying the historical and current factors responsible for the present deplorable status. It also attempts at a theoretical evaluation and comparison of different approaches to balance of payments. With a firm belief in the merit of the monetary approach, the author has attempted to prove that why BoP should be treated as essentially a monetary phenomenon. By computing the demand for money, reserve flow and sterilisation equations and the monetary disequilibrium factor and then empirically measuring its impact on different components of the BoP, the author concludes that disequilibrium in the domestic money market significantly influences balance of payments and further that the budget deficit and its financing by the Reserve Bank of India significantly influence the monetary disequilibrium factor. The study after making a comparison between devaluation and credit reduction as two different tools for achieving equilibrium in BoP gives its verdict in favour of credit reduction, i.e. monetary management. The book suggests greater commitment to be made towards implementing the policy of monetary targeting and monetary discipline. Such a policy by putting a limit on the growth of money supply would restrict RBI financing of the budgetary deficit, impose fiscal discipline and ultimately serve the dual objective of bringing in price stability and BoP equilibrium. The book thus provides a monetary solution to India’s BoP concerns.