Indian government reduced the tariff on import of handicrafts from foreign countries. The tariff was 60% earlier, which was now reduced to 30%. According to you, which of the following would be the result?

The correct answer is Option 2: There would be a deficit in BoP account

When the Indian government reduces the tariff on the import of handicrafts, it becomes cheaper to import such goods. This can lead to an increase in imports, as foreign handicrafts become more affordable for consumers.

Increased imports would lead to more outflow of foreign currency to pay for these goods. This could contribute to a deficit in the trade balance, which is part of the current account of the BoP. A deficit in the Balance of Payments occurs when the value of imports exceeds the value of exports, causing more money to flow out of the country than comes in.