Indian Economy Quiz: Balance of Payments and Convertibility |23 Feb, 2021

When an increase in one form of net exports drives up a country’s exchange rate, it is called the Dutch Disease.

· Such instances make other exports noncompetitive in the world market and impair the ability of domestic products to compete with imports.

· The term originated from the supposed effect of natural gas discoveries on the Netherlands economy.

Source: TMH Ramesh Singh

An allocation of the scarce resource of the economy gives rise to a particular combination of different goods and services.

· Given the total amount of resources, it is possible to allocate the resources in many different ways and, thereby achieving different mixes of all possible goods and services.

· The collection of all possible combinations of the goods and services that can be produced from a given number of resources and a given stock of technological knowledge is called the production possibility set/frontier of the economy.

Source: TMH Ramesh Singh

The J-curve effect is often cited in economics to describe, for instance, the way that a country’s balance of trade initially worsens following a devaluation of its currency, then quickly recovers and finally surpasses its previous performance.

Source: TMH Ramesh Singh

Internal debt of India consists of:

· Dated government securities or G-secs.

· Treasury Bills or T-bills

· External Assistance

· Short term borrowings

· Public Debt definition by Union Government

Source: Economic Survey

In some situations, such as high budget deficit etc, there is rise in government borrowing from the market.

· Due to the excessive borrowing by the government from the market, there is little credit left for private sector to borrow.

· As a result, interest rate rises, making borrowings by private sector costly and leading to decline in private investment. This is known as crowding out effect.

· The private borrowing and subsequent private investment is discouraged.

Source: The Hindu

Autarky: The idea of self-sufficiency and ‘no’ international trade by a country.

None of the countries of the world has been able to produce all the goods and services required by its population at competitive prices, however, some tried to live it up at the cost of inefficiency and comparative poverty.

Source: TMH Ramesh Singh

The Economic Census is being conducted by Ministry of Statistics and Programme Implementation (MoSPI) to provide disaggregated information on various operational and structural aspects of all establishments in the country.

All entrepreneurial units in the country which are involved in any economic activities of either agricultural or non-agricultural sector which are engaged in production and/or distribution of goods and/or services not for the sole purpose of own consumption.

Source: TMH Ramesh Singh

Comparative advantage is an economic term that refers to an economy’s ability to produce goods and services at a lower opportunity cost than that of trade partners.

· A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.

· The law of comparative advantage is popularly attributed to English political economist David Ricardo and his book “On the Principles of Political Economy and Taxation” in 1817, although it is likely that Ricardo’s mentor James Mill originated the analysis.

· One of the most important concepts in economic theory, comparative advantage is a fundamental tenet of the argument that all actors, at all times, can mutually benefit from cooperation and voluntary trade. It is also a foundational principle in the theory of international trade.

Source: TMH Ramesh Singh

Foreign portfolio investment (FPI) refers to investing in the financial assets of a foreign country, such as stocks or bonds available on an exchange.

· This type of investment is at times viewed less favorably than direct investment because portfolio investments can be sold off quickly and are at times seen as short-term attempts to make money, rather than a long-term investment in the economy.

· Portfolio investment typically has a shorter time frame for investment return than direct investment.

· As with any equity investment, foreign portfolio investors usually expect to quickly realize a profit on their investments.

· Unlike direct investment, portfolio investment does not offer control over the business entity in which the investment is made.

Source: TMH Ramesh Singh

India’s foreign exchange earning capacity was always poor and hence it had all possible provisions to check the foreign exchange outflow, be it for current purposes or capital purposes (remember the draconian FERA). But the process of economic reforms has changed the situation to unidentifiable levels.

Current Account: Current account is today fully convertible (operationalized on 19 August, 1994).

· It means that the full amount of the foreign exchange required by someone for current purposes will be made available to him at official exchange rate and there could be an un prohibited outflow of foreign exchange (earlier it was partially convertible).

· India was obliged to do so as per Article VIII of the IMF which prohibits any exchange restrictions on current international transactions (keep in mind that India was under preconditions of the IMF since 1991).

Capital Account: After the recommendations of the S.S. Tarapore Committee (1997) on Capital Account Convertibility, India has been moving in the direction of allowing full convertibility in this account, but with required precautions.

Source: TMH Ramesh Singh