Quick answer: Causes of BoP disequilibrium include economic factors (trade deficit, domestic inflation, rapid development, overvalued currency, business cycles, commodity price shocks, weak exports, demonstration effect), financial factors (capital flight, interest rate differentials, foreign debt servicing) and structural or other factors (shifts in demand, population growth, political instability, natural disasters, government policy).
| Episode | Detail |
|---|---|
| 1991 India | Reserves about $1.2 billion |
| FY13 India | CAD 4.8% of GDP |
| FY25 India | CAD about 0.6% of GDP |
| Biggest import | Crude oil |
In mid-1991, India’s foreign exchange reserves fell to about $1.2 billion, enough for only about three weeks of imports. The Gulf War had pushed up oil prices, remittances from Gulf workers dried up, and NRIs pulled deposits out. In 2013, a smaller scare followed: the current account deficit hit a record 4.8% of GDP in FY13, driven by oil and gold imports, and the rupee fell sharply during the “taper tantrum”.
Both were cases of disequilibrium in the balance of payments: a persistent gap between what a country pays abroad and what it earns. Here are the main causes, grouped by type. For how countries fix it, see measures to correct BoP disequilibrium.
Economic Causes
1. Large Trade Deficit
When imports far exceed exports, the gap must be financed. India imports more than $130 billion of crude oil a year, so oil prices move its trade balance sharply.
2. Inflation at Home
Higher domestic prices make exports less competitive and imports cheaper.
3. Rapid Development
Growing economies import capital goods, technology and fuel faster than exports can rise.
4. Overvalued Exchange Rate
A currency held too high makes exports costly abroad and encourages imports.
5. Business Cycles
A boom raises imports; a recession abroad cuts demand for your exports.
6. Commodity Price Shocks
A rise in the price of oil, gold or fertiliser can widen the deficit quickly.
7. Weak Export Competitiveness
Low productivity, poor quality or high logistics costs hold exports back.
8. Demonstration Effect
People in developing countries copy consumption patterns of richer nations, raising imports of consumer goods.
Financial Causes
9. Capital Flight
Investors pull money out during crises or when returns look better elsewhere, as in 1991 and 2013.
10. Interest Rate Differentials
Higher rates abroad, such as US rate hikes, draw capital away.
11. Heavy Foreign Debt Servicing
Interest and repayments on external debt add to outflows.
Structural and Other Causes
12. Changes in Demand Patterns
Shifts in global taste or technology can kill demand for traditional exports.
13. Population Growth
Rising population raises demand for food and goods, sometimes beyond domestic supply.
14. Political Instability
Uncertainty scares away investors and tourists.
15. Natural Disasters and Crop Failure
Droughts cut farm exports and can force food imports.
16. Government Policies
Tariff cuts, subsidy changes or sudden export bans shift the balance.
India’s BoP Episodes
| Period | What happened | Main causes |
|---|---|---|
| 1990-91 | Reserves fell to about $1.2 billion; IMF loan, rupee devalued | Oil price spike, Gulf remittance loss, capital flight, high fiscal deficit |
| FY13 | Current account deficit at record 4.8% of GDP | Oil and gold imports, slowing exports |
| 2013 (May to August) | Rupee fell sharply after US Fed signalled tapering | Capital outflows, interest rate differentials |
| FY25 | Current account deficit about 0.6% of GDP | Strong services exports and remittances offset goods deficit |
Background: equilibrium and disequilibrium in BoP and types of BoP disequilibrium.
