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Macro Economics

Notes Exchange Control

Exchange control refers to government regulation of exchange rate as well as restriction on the
conversion of local currency into foreign currency. Under this system, all exporters are asked to
surrender their foreign exchanges to the central bank. Then foreign exchanges are rationed out
to licensed importers. The aim of exchange control is to bring about an equality between the
demand for and the supply of foreign exchange through state intervention and control.

Direct Controls

Direct controls take the form of exchange control, capital control and commodity control. Imports
and exports can be directly controlled by various measures.

Devaluation

The home currency may be deliberately deflated. In that case, prices will come down and
exports would be promoted and imports restricted.
Import Restriction and Export Promotion

Imports may be restricted by tariff, quotas, duties, licenses and so on. Exports may be promoted
by giving bounties, incentives, tax concessions, advertisement and publicity, cost reduction,
quality improvement and the like.
However, every one of the above methods has its own limitations.

Example: Deflation is dangerous, depreciation is temporary and retaliatory, devaluation
is inflationary and exchange control is difficult to administer. Therefore, sometimes it is said
that it is easy to control output and employment, but harder to control balance of payments.

Self Assessment

Fill in the blanks:
6. If MPS = ...................................., then increase in imports will be equal to increase in exports.
7. .............................. means an official reduction in the external value of a currency vis-à-vis
gold or other currencies.
8. ............................... refers to government regulation of exchange rate as well as restriction
on the conversion of local currency into foreign currency.
9. Under .................................... , the exchange rate was fixed in terms of dollar or gold.
10. ...................................... in income may lead to more imports and less exports.

12.3 India’s Balance of Payments

Prior to 1956-57, for most years in the fifties, India had a current account surplus. But the position
changed in 1956-57, when India faced BOP crisis. The trade deficit increased from 3.8 per cent of
GDP at market prices to 4.5 per cent.

The BOP position deteriorated once again in 1966-67. In 1965, the United States suspended its
aid in response to Indo-Pakistan war and later refused of renew the PL 480 agreement on a

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