Critically examine the implications of globalization on India's balance of payments and currency exchange rates.

Published: May 9, 2017

Since the time of liberalization of the economy in 1991 India has played a very major role in the global economy. In these two decades, the economy has become increasingly market oriented and greater foreign exchange and competitiveness. But on seeing the statistics of the financial years 2004-05 until recently it is evident that India has been facing a balance of payment deficit. After the inflation and economic slowdown in the year 2008, India’s trade deficit and current account deficit has been very high of around 4% of its GDP. Some amount of deficit is not harmful. So in the early years, it could be met through its foreign exchange reserves and FDIs and FIIs and NRI deposits in foreign exchange accounts of the banks. But then it increased so much that it was problematic to meet the deficits. The scenario is however different in the fiscal year 2016-17 when the deficit has gone down to 0.6% of GDP, this has been mainly due to a decrease in the trade deficits because of a decline in merchandise imports than exports. In the case of exchange rates, the price of Indian rupee had started rising steadily due to a surge in the supply of foreign exchange rates. This greatly affected exports of India in terms of profitability competitiveness. This has also affected the currency exchange rates of India. Globalization has not improved the position of foreign exchange in India. Liberalization has increased foreign exchange reserves, but the huge amount of deficits lead to a loss, forcing India to be in a disadvantaged situation.

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