Read the passage carefully and answer the questions based on the passage:

Balance of Payment

Balance of Payment is defined as the statement of accounts of a country's inflows and outflows of foreign exchange during a specified period of time. It consists of two main accounts, i.e. Current Account and Capital Account. A deficit or surplus in the current account is determined by the country's exports and imports, whereas the capital account records transactions involving non-financial and financial assets.

India's BOP typically reflects its trade deficit, services surplus and capital inflows. To finance the deficit in its overall BOP, few transactions take place in its official reserves of foreign exchange.

What could persistent current account deficit lead to?

Dependence on foreign borrowings.

The correct answer is Option (3) → Dependence on foreign borrowings.

• A persistent current account deficit means that a country is importing more goods, services, and transfers than it is exporting.

• To finance this deficit, the country must rely on:

  • Capital inflows, such as foreign investment or

  • Borrowings from abroad, leading to increased dependence on foreign debt.

Other Options: 

• Currency appreciation is the opposite of what typically happens with a persistent deficit.

• Increased reserves would happen if there was a surplus, not a deficit.

• Trade surplus is the opposite of a trade deficit, which is the primary component of a current account deficit.