The Balance of Payments:

Abstract

The world economy, led by the buoyant economic activity in emerging economies, is gradually recovering from the crisis. The risks however remain, as advanced economies face large fiscal deficit, high public debt and unemployment levels and tepid aggregate demand, leading to subdued growth. The sovereign debt crisis in the peripheral euro-zone countries is contributing to the uncertainty. At the same time, large capital flows to emerging economies, rising oil and agricultural prices are fueling inflationary pressures that may affect the nascent global recovery. In the backdrop of these developments, the Indian economy continues to exhibit resilience, moving steadily towards the pre-crisis growth path. The current account deficit however, has widened due to robust import demand and lower invisibles surplus. These are being largely financed by the relatively higher capital flows, leading to moderate accretion in reserves. There are however challenges that include volatile nature of foreign institutional investment that is characterized by surge and reversal of capital flows, deceleration in foreign direct investment and the risk of further slowdown in advanced economies that may affect exports and strain balance of payments.