The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that sustaining the improvement in the BoP position in the medium term is a challenge. Given the uncertain global environment and the frequent bouts of flight of capital on aversion to all kinds of risks, there is need to put in place a mechanism for closely monitoring developments and assessing vulnerabilities so as to take measures to cope with the situation.

The Survey observed that the improvement in the BoP position during the latter half of 2013-14 was indeed swift and owed to exceptional measures like restrictions on non-essential imports and limited period incentives for certain varieties of capital flows and the impact of overall economic slowdown on imports. Sustaining the robust outcome in the medium term is a challenge as some of the restrictions need to be gradually withdrawn and there is a need to adjust not merely to the asset purchase taper by the US Fed but also to the eventual exit from the accommodative monetary policy stance by the advanced economies.

Balance of Payments vulnerability requires a monitoring mechanism to manage capital flow volatility and policy withdrawal effects. Sustaining improvement in the Balance of Payments is a medium term challenge because recent gains stem from temporary measures-import restrictions, limited period capital flow incentives, and lower import demand-and may reverse as those measures are withdrawn; a mechanism for close monitoring and vulnerability assessment is needed to adapt to external monetary policy normalization.