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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.

How can a country reduce the BOP deficit?

Promoting exports and attracting investment.

The correct answer is Option (1) → Promoting exports and attracting investment.

A Balance of Payments deficit occurs when a country's total foreign exchange outflows exceed its inflows. To reduce this deficit, the country can promote exports to earn more foreign exchange and attract foreign investment to increase capital inflows. Both measures help improve the foreign exchange position and reduce the gap in the balance of payments.