BALANCE OF PAYMENTS
MACRO ECONOMICS
BALANCE OF PAYMENTSMACRO ECONOMICS PROJECT
What do you mean by Balance of payments? Analyse the trends in
exports and imports (in value terms) with chart. Do you think
Indias balance of payments condition is in adverse state? Discuss.
How it can be sorted out? Discuss the government policies adopted
by the government of India since 1950-51
ContentsBALANCE OF PAYMENTS AN INTRODUCTION3BALANCE OF CURRENT
ACCOUNT4THE CAPITAL ACCOUNT5ACCOMMODATING & AUTONOMOUS CAPITAL
FLOWS6BALANCE OF INVISIBLE TRADE6BALANCE OF VISIBLE TRADE6ERRORS
AND OMISSIONS7UNILATERAL TRANSFERS7DETAILED OUTLINE OF THE BOP
STATEMENT & SUB ACCOUNTS7Other Accounts8TREND IN EXPORTS &
IMPORTS - INDIA9Exports10Imports12INDIAS BALANCE OF PAYMENTS
CONDITION13Measures to improve balance of payments18policies
adopted by the government of India since 1950-5118DEFICIT IN THE
BASIC BALANCE - DESIRABLE OR UNDESIRABLE!21
BALANCE OF PAYMENTS AN INTRODUCTIONThe balance of payments of a
country is a systematic record of all economic transactions between
the residents of a country and the rest of the world. It presents a
classified record of all receipts on account of goods exported,
services rendered and capital received by residents and payments
made by theme on account of goods imported and services received
from the capital transferred to non-residents or foreigners.-
Reserve Bank of IndiaThe definition given by RBI needs to be
clarified further for the following points:A. Economic
TransactionsAn economic transaction is an exchange of value,
typically an act in which there is transfer of title to an economic
good the rendering of an economic service, or the transfer of title
to assets from one economic agent (individual, business,
government, etc) to another. An international economic transaction
evidently involves such transfer of title or rendering of service
from residents of one country to another. Such a transfer may be a
requited transfer (the transferee gives something of an economic
value to the transferor in return) or an unrequited transfer (a
unilateral gift).B. ResidentThe term resident is not identical with
citizen though normally there is a substantial overlap. As regards
individuals, residents are those individuals whose general centre
of interest can be said to rest in the given economy. They consume
goods and services; participate in economic activity within the
territory of the country on other than temporary basis. In general
terms:The balance of payments (BOP) measures the Receipts &
payments that flow between any individual country and all other
countries over a period, normally over a financial year. It is used
to summarize all international economic transactions including
trade, services, debts, Investments for that country during the
specified period. The BOP is determined by the balance of the
country's exports and imports of goods, services, and financial
capital, as well as financial transfers. It reflects all payments
and liabilities to foreigners (debits) and all payments and
liabilities from foreigners (credits). Balance of payments is one
of the major indicators of a country's status in international
trade, with net capital outflow.The balance, like other accounting
statements, is prepared in the domestic currency. Foreign assets
and flows are valued at the exchange rate prevailing at the time of
the transaction.
The components of a BOP statement are:A. Current Account
B. Capital Account
C. IMF
D. SDR Allocation
E. Errors & Omissions
F. Reserves and Monetary Gold
BALANCE OF CURRENT ACCOUNTBOP on current account refers to the
inclusion of three balances of namely Merchandise balance (Trade
balance), Services balance (investment income, tourism, banking
etc.) and Unilateral Transfer balance. In other words it reflects
the net flow of goods, services and unilateral transfers (gifts,
pensions, remittances etc.). The net value of the balances of
visible trade and of invisible trade and of unilateral transfers
defines the balance on current account. BOP on current account is
also referred to as Net Foreign Investment because the sum
represents the contribution of Foreign Trade to GNP.
THE CAPITAL ACCOUNTThe capital account records all international
transactions that involve a resident of the country concerned
changing either his assets with or his liabilities to a resident of
another country. Transactions in the capital account reflect a
change in a stock either assets or liabilities.It is often useful
to make distinctions between various forms of capital account
transactions:Direct investment is the act of purchasing an asset
and the same time acquiring control of it (other than the ability
to re-sell it). Such business transactions form the major part of
private direct investment in other countries, multinational
corporations being especially important. There are of course some
examples of such transactions by individuals, like purchase of the
second home in another country.
ACCOMMODATING & AUTONOMOUS CAPITAL FLOWSTransactions are
said to Autonomous if their value is determined independently of
the BOP. Accommodating capital flows on the other hand are
determined by the net consequences of the autonomous items. An
autonomous transaction is one undertaken for its own sake in
response to the given configuration of prices, exchange rates,
interest rates etc, usually in order to realise a profit or reduced
costs. It does not take into account the situation elsewhere in the
BOP. An accommodating transaction on the other hand is undertaken
with the motive of settling the imbalance arising out of other
transactions.BALANCE OF INVISIBLE TRADEJust as a country exports
goods and imports goods a country also exports and imports what are
called as services (invisibles). The service account records all
the service exported and imported by a country in a year. Unlike
goods which are tangible or visible services are intangible.
Accordingly services transactions are regarded as invisible items
in the BOP. They are invisible in the sense that service receipts
and payments are not recorded at the port of entry or exit as in
the case with the merchandise imports and exports receipts. Goods
and services accounts together constitute the largest and
economically the most significant components in the BOP of any
country. The service transactions take various forms. They
basically include 1) transportation, banking, and insurance
receipts and payments from and to the foreign countries, 2)
tourism, travel services and tourist purchases of goods and
services received from foreign visitors to home country and paid
out in foreign countries by home country citizens, 3) expenses of
students studying abroad and receipts from foreign students
studying in the home country, etc. Balance of Invisible Trade is a
sum of all invisible service receipts and payments in which the sum
could be positive or negative or zero. A positive sum is regarded
as favourable to a country and a negative sum is considered as
unfavourable. BALANCE OF VISIBLE TRADEBalance of visible trade is
also known as balance of merchandise trade, and it covers all
transactions related to movable goods. The valuation should be on
F.O.B basis so that international freight and insurance are treated
as distinct services and not merged with the value of goods
themselves. Exports valued on F.O.B basis are the credit entries.
Imports valued at C.I.F are the debit entries. The difference
between the total of debits and credits appears in the Net column.
This is the Balance of Visible Trade.In visible trade if the
receipts from exports of goods happen to be equal to the payments
for the imports of goods, we describe the situation as one of zero
goods balance.
ERRORS AND OMISSIONSErrors and omissions is a statistical
residue. It is used to balance the statement because in practice it
is not possible to have complete and accurate data for reported
items and because these cannot, therefore, ordinarily have equal
entries for debits and credits. The entry for net errors and
omissions often reflects unreported flows of private capital,
although the conclusions that can be drawn from them vary a great
deal from country to country, and even in the same country from
time to time, depending on the reliability of the reported
information. UNILATERAL TRANSFERSUnilateral transfers or unrequited
receipts, are receipts which the residents of a country receive for
free, without having to make any present or future payments in
return. Receipts from abroad are entered as positive items,
payments abroad as negative items. Thus the unilateral transfer
account includes all gifts, grants and reparation receipts and
payments to foreign countries. Unilateral transfer consist of two
types of transfers: (a) government transfers (b) private
transfers.DETAILED OUTLINE OF THE BOP STATEMENT & SUB ACCOUNTSA
BOP statement (revised) includes the following sub
accounts:ItemsCreditsDebitsNet
G. Current Account
1. Merchandise
a. Private
b. Government
2. Invisibles
a. Travel
b. Transportation
c. Insurance
d. Investment Income
e. Government (not included elsewhere)
f. Miscellaneous
3. Transfer Payments
a. Official
b. Private
Total Current Account (1+2+3)
H. Capital Account
2. Private
a. Long Term
b. Short Term
3. Banking
4. Official
a. Loans
b. Amortisation
c. Miscellaneous
Total Capital Account (1+2+3)
I. IMF
J. SDR Allocation
K. Capital Account, IMF & SDR Allocation (B+C+D)
L. Total Current Account, Capital Account, IMF & SDR
Allocation (A+E)
M. Errors & Omissions
N. Reserves and Monetary Gold
Other AccountsThe IMF account contains purchases (credits) and
repurchases (debits) from the IMF. SDRs Special Drawing Rights are
a reserve asset created by the IMF and allocated from time to time
to member countries. Within certain limitations it can be used to
settle international payments between monetary authorities of
member countries. An allocation is a credit while retirement is a
debit. The Reserve and Monetary Gold account records increases
(debits) and decreases (credits) in reserve assets. Reserve assets
consist of RBIs holdings of gold and foreign exchange (in the form
of balances with foreign central banks and investment in foreign
government securities) and governments holding of SDRs. If the
balance of payment is a double entry accounting record, then apart
from errors and omissions, it must always balance. The imbalance
must be interpreted in some sense as an economic
disequilibrium.
TREND IN EXPORTS & IMPORTS - INDIAExports are the major
focus of India's trade policy as it is important for addressing
macroeconomic concerns. The incentives offered by the export
promotion package are comparable to that of any other country. The
focus remains on inducing the foreign investors to set up export
oriented units in India. India offers a production base for foreign
markets around the world for sourcing components and products
manufactured at a low cost.India's strategic location, between
Middle East and South East Asia, presents itself as a country with
immense business opportunities. The countries labour advantage adds
to this. India has vast reserves of technical and scientific
manpower. India's skilled labour is in great demand in the world's
premier organizations. Both skilled and unskilled labour is easy to
find and wage rates are highly competitive compared to
international levels. Language is not a barrier as the professional
work force is conversant in English and the main transactions and
procedures are done in the same language. The government also
provides a number of incentives and facilities for exporters.
India's rich resource and production base provides significant
opportunities for investors to establish export units.Let us have a
look at the import & export data for the last 20 years to
analyze the trend for the same in Indian context:
Emerging destinationsIndias 21 emerging exporting countries have
been listed in the table below. These countries have been growing
strongly in the last five years and their share in Indias
merchandise exports has gone up from 23.5% in FY02 to around 27.8%
in FY07. Of all the 21 countries, Indias exports to Yemen Republic
have seen the most impressive growth of more than 100% in FY07 as
compared to last year. For instance, exports of mineral fuels,
mineral oils and waxes (Under the HS Code 27) recorded a y-o-y
growth of 55% and constituted almost 74% of Indias total exports to
Yemen Republic. Even exports to Pakistan grew phenomenally at a
y-o-y growth rate of almost 96%, driven by sugar, organic chemicals
and cotton exports, which together constituted over 62% of the
total exports to Pakistan.
The analysis of the trend in recent past throws up certain
pointers which I have listed as below: Exports (i) The decline in
exports which started since October 2008 continued during the first
quarter of 2009-10. On a BoP basis, Indias merchandise exports
recorded a decline of 21.0 per cent in Q1 of 2009-10 as against an
increase of 43.0 per cent in Q1 of 2008-09.
(ii) As per the data released by the Directorate General of
Commercial Intelligence and Statistics (DGCI&S), merchandise
exports declined by 26.4 per cent in Q1 of 2009-10 as against a
higher growth of 37.4 per cent in Q1 of 2008-09, reflecting fall in
demand worldwide due to the global economic crisis.INDIAs
cumulative value of exports for the period April- August, 2009 was
Rs. 311715 crore as against Rs. 391841 crore registering a negative
growth of 20.4 per cent in Rupee terms over the same period last
year. Cumulative value of imports for the period April- August 2009
was Rs. 497108 crore as against Rs. 648041 crore registering a
negative growth of 23.3 per cent in Rupee terms over the same
period last year.Oil imports during April- August, 2009 were valued
at US$ 28275 million which was 47.4 per cent lower than the oil
imports of US $ 53742 million in the corresponding period last
year. Non-oil imports during April- August, 2009 were valued at US$
74024 million which was 25.9 per cent lower than the level of such
imports valued at US$99949 million in April- August, 2008.The trade
deficit for April- August, 2009 was estimated at US $38171 million
which was lower than the deficit of US $ 60732 million during
April-August, 2008.EXPORTS & IMPORTS (April-August, FY
2009-10)
In $ MillionIn Rs Crore
Exports including re-exports
2008-0992959391841
2009-1064129311715
Growth 2009-10/2008-2009 (percent)-31.0-20.4
Imports
2008-09153691648041
2009-10102300497108
Growth 2009-10/2008-2009 (percent)-33.4-23.3
Trade Balance
2008-09-60732-256200
2009-10-38171-185393
Figures for 2008-09 and 2009-10 are provisional
The trade deficit for April- June, 2009 was estimated at $ 15504
million which was lower than the deficit at $ 28642 million during
April- June, 2008. Imports(i) Import payments, on a BoP basis, also
continued its declining trend. Imports declined by 19.6 per cent in
Q1 of 2009-10 as against a positive growth of 42.9 per cent in Q1
of 2008-09.
(ii) According to the data released by the DGCI&S, the
decline in imports is mainly attributed to the sharp fall in oil
import payments due to lower crude oil prices during Q1 of 2009-10
POL imports recorded a sharp decline of 56.9 per cent during Q1 of
2009-10 as against a sharp increase of 74.2 per cent during Q1 of
2008-09. (iii) According to the DGCI&S data, out of the total
decline in imports of US$ 26.7 billion in Q1 of 2009-10 over the
corresponding previous quarter, oil imports declined by US$ 16.8
billion, while non-oil imports decreased by US$ 9.8 billion Hence
the trend we have seen in the recent past was the result of
worldwide recession had. The affect of the same was seen throughout
the economies. It did impact the export-based economies by a huge
margin. But the situation is now towards the improving trend and
the future presents a much improved scenario. Over the last five
years, Indias merchandise exports underwent significant changes in
terms of composition and destinations. During FY97 to FY07, Indias
contribution to world trade has gone up considerably from 0.5% to
around 1.1%, underlined by several milestones. Indias merchandise
exports started accelerating since FY03 (in US dollar terms) and
grew at a CAGR of 24.9% during FY04-08; in fact, this growth rate
was much higher than the global merchandise export growth of 16.1%.
The Indian government plans to raise its merchandise exports to US$
200 billion by FY09 from US$ 155.5 billion in FY08, which
translates into a growth of 28.6%.Indias exports are expected to
accelerate in future, taking into account the growing numbers of
approved, in-principle and notified SEZs in the country. As on
March 27, 2008, there were 453 (of which 246 valid approvals)
approved SEZs, 136 in-principle and 207 notified SEZs, which once
operational are expected to boost Indias merchandise exports. It is
to be noted that in FY07, exports from 19 functional SEZs stood at
Rs 347.9 billion and during April-December 2007-08 they reached Rs
400 billion. It is estimated that exports from SEZs would reach Rs
1,246.8 billion by FY09.
INDIAS BALANCE OF PAYMENTS CONDITIONItemRupees croreUS $
million
2006-072007-08 PR2008-09 P2006-072007-08 PR2008-09 P
1234567
A. CURRENT ACCOUNT
1.Exports,
f.o.b.5,82,8716,67,7577,98,9561,28,8881,66,1631,75,184
2.Imports,
c.i.f.8,62,83310,36,28913,41,0691,90,6702,57,7892,94,587
3.Trade
Balance-2,79,962-3,68,532-5,42,113-61,782-91,626-1,19,403
4.Invisibles, Net2,35,5792,99,6184,09,84252,21774,59289,586
a)Non-Factor
Services1,33,0641,51,0592,28,77829,46937,56549,818
of which:
Software Services1,41,3561,62,0202,15,58831,30040,30047,000
b)Income-33,234-19,888-21,116-7,331-4,917-4,511
c)Private
Transfers1,34,6081,67,4952,01,05029,82541,70544,047
d)Official Transfers1,1419521,130254239232
5.Current Account
Balance-44,383-68,914-1,32,271-9,565-17,034-29,817
B. CAPITAL ACCOUNT
1.Foreign Investment, Net
(a+b)66,7911,80,78811,76014,75344,9573,462
a)Direct Investment34,91061,79376,8227,69315,40117,496
of which:
i)In India1,02,6521,37,4341,58,57922,73934,23634,982
Equity73,9691,07,3201,25,36216,39426,75827,809
Re-invested Earnings26,37128,85929,7055,8287,1686,426
Other Capital2,3121,2553,512517310747
ii) Abroad-67,742-75,641-81,757-15,046-18,835-17,486
Equity-56,711-57,936-63,478-12,604-14,421-13,558
Re-invested Earnings-4,868-4,363-4,985-1,076-1,084-1,084
Other Capital-6,163-13,342-13,294-1,366-3,330-2,844
b)Portfolio
Investment31,8811,18,995-65,0627,06029,556-14,034
In India31,6301,18,348-64,2067,00429,394-13,855
Abroad251647-85656162-179
2.External Assistance, Net7,9738,46512,4351,7752,1142,638
Disbursements16,97817,02223,5353,7674,2415,042
Amortisation-9,005-8,557-11,100-1,992-2,127-2,404
3.Commercial Borrowings,
Net72,36591,18038,00916,10322,6338,158
Disbursements93,9321,22,27071,62620,88330,37615,382
Amortisation-21,567-31,090-33,617-4,780-7,743-7,224
4.Short Term Credit, Net30,09668,878-31,1606,61217,183-5,795
5.Banking Capital
of which:8,47747,148-19,8681,91311,757-3,397
NRI Deposits, Net19,57470620,4314,3211794,290
6.Rupee Debt Service-725-488-476-162-121-101
7.Other Capital, Net @18,69637,80221,6814,2099,4704,181
8.Total Capital
Account2,03,6734,33,77332,38145,2031,07,9939,146
C. Errors & Omissions4,3444,8302,7759681,205591
D. Overall Balance
[A(5)+B(8)+C]1,63,6343,69,689-97,11536,60692,164-20,080
E. Monetary Movements
(F+G)-1,63,634-3,69,68997,115-36,606-92,16420,080
F.IMF, Net000000
G. Reserves and Monetary
Gold-1,63,634-3,69,68997,115-36,606-92,16420,080
(Increase -, Decrease +)
INDIAs trade deficit during the first three months of current
fiscal year (2009-10) on a balance of payments (BoP) basis was
large due to the steeper decline in the pace of exports than that
of imports. The trade deficit on a BoP basis in Q1 (US$ 26.0
billion) was, however, less than that in Q1 of 2008-09 (US$ 31.4
billion).
Table 3: Balance of payments (USD bn and % of GDP)
The key features of Indias BoP that emerged in Q1 of fiscal
2009-10 were:(i) The decline in exports which started since October
2008 continued during the first quarter of 2009-10. Import
payments, on a BoP basis, also continued its declining trend mainly
due to lower oil import bill(ii) Private transfer receipts remained
buoyant and increased by 9.4 per cent to US$ 13.3 billion during Q1
of 2009-10. Exports of software services, however, declined during
Q1 of 2009-10(iii) Despite net invisibles surplus at US$ 20.2
billion, the large trade deficit (US$ 26.0 billion) mainly on
account of sharp decline in exports led to a current account
deficit of US$ 5.8 billion in Q1 of 2009-10 (US$ 9.0 billion during
Q1 of 2008-09(iv) With the revival in capital inflows to India,
particularly foreign investments, the capital account showed a
turnaround from a negative balance in last two quarters of 2008-09
to a positive balance of US$ 6.7 billion during Q1 of 2009-10(v)
Portfolio investment witnessed a sharp turnaround from net outflows
of US$ 2.7 billion in Q4 of 2008-09 to net inflows of US$ 8.3
billion during Q1 of 2009-10(vi) NRI deposits also witnessed higher
inflows reflecting the positive impact of the revisions in the
ceiling interest rate on NRI deposits(vii) There was a marginal
increase in reserves on BoP basis (i.e. excluding valuation) during
Q1 of 2009-10. However, the foreign exchange reserves including
valuation increased by US$ 13.2 billion during Q1 of 2009-10
implying that the increase in reserves during this period was
mainly due to valuation gains as the US dollar has depreciated
against major currencies.
Invisibles(i) During Q1 of 2009-10, in net terms, the invisibles
balance at US$ 20.2 billion was lower than that in the
corresponding period of the previous year (US$ 22.4 billion),
though higher than that in Q4 of 2008-09 (US$ 19.3 billion).
Invisibles Receipts(i) Invisibles receipts registered a marginal
decline of 0.7 per cent in Q1 of 2009-10 (as against a higher
growth of 30.3 per cent in Q1 of 2008-09) on account of a decline
in almost all categories of services except insurance and financial
services and a decline of 20.3 per cent in investment income
receipts.(ii) Exports of software services declined by 11.5 per
cent during Q1 of 2009-10 as against an increase of 37.6 per cent
in Q1 of 2008-09(iii) Travel receipts at US$ 2.3 billion during Q1
of 2009-10 declined by 8.7 per cent as against an increase of 19.9
per cent in Q1 of 2008-09 reflecting a slowdown in tourist arrivals
in the country since November 2008. Invisibles PaymentsInvisibles
payments recorded a positive growth of 11.9 per cent in Q1 of
2009-10 (13.5 per cent in Q1 of 2008-09) mainly due to growth in
payments under services and income account. In the services
account, however, payments under travel, transportation, G.N.I.E.
and software services recorded a negative growth in Q1 of 2009-10.
Invisibles BalanceA combined effect of decline in invisibles
receipts and increase in invisibles payments led to marginally
lower net invisibles (invisibles receipts minus invisibles
payments) at US$ 20.2 billion in Q1 of 2009-10 than that in the
corresponding period of the previous year (US$ 22.4 billion)
Current Account DeficitDespite net invisibles surplus, the large
trade deficit mainly on account of sharp decline in exports led to
a current account deficit of US$ 5.8 billion in Q1 of 2009-10 (US$
9.0 billion during Q1 of 2008-09). Capital Account and Reservesi)
The gross capital inflows to India revived during Q1 of 2009-10 as
compared to the last two quarters of 2008-09 manifesting confidence
in Indias long-term growth prospects. The gross inflows were,
however, at US$ 78.5 billion as compared to US$ 90.9 billion in Q1
of 2008-09 mainly led by inflows under FIIs, FDI and NRI deposits.
Gross capital outflows during Q1 of 2009-10 stood lower at US$ 71.8
billion as against US$ 79.7 billion in Q1 of 2008-09. ii) With the
revival in capital inflows to India, particularly foreign
investments, the capital account showed a turnaround from a
negative balance in last two quarters of 2008-09 to a positive
balance of US$ 6.7 billion during Q1 of 2009-10 (US$ 11.1 billion
in Q1 of 2008-09). iii) Net FDI inflows (net inward FDI minus net
outward FDI) amounted to US$ 6.8 billion in Q1 of 2009-10 (US$ 9.0
billion in Q1 of 2008-09). Net inward FDI stood at US$ 9.5 billion
during Q1 of 2009-10 (US$ 11.9 billion in Q1 of 2008-09). Net
outward FDI stood at US$ 2.6 billion in Q1 of 2009-10 as compared
with US$ 2.9 billion in Q1 of 2008-09.iv) During Q1 of 2009-10, FDI
to India was channelled mainly into manufacturing sector (19.2 per
cent), real estate activities (15.6 per cent), financial services
(15.4 per cent), construction (12.2 per cent) and business services
(11.7 per cent). Mauritius continued to be the major source of FDI
during Q1 of 2009-10 with a share of 48.9 per cent followed by USA
at 12.8 per cent. v) Portfolio investment primarily comprising
foreign institutional investors (FIIs) investments and American
Depository Receipts (ADRs)/Global Depository Receipts (GDRs)
witnessed a sharp turnaround from net outflows of US$ 2.7 billion
in Q4 of 2008-09 to net inflows of US$ 8.3 billion during Q1 of
2009-10.vi) The tightness in liquidity in the overseas markets
continued during Q1 of 2009-10. The approvals of external
commercial borrowings (ECBs) were very low in the first two months
of 2009-10; however, it recovered during June 2009. vii) The gross
disbursements of short-term trade credit was US$ 10.1 billion
during Q1 of 2009-10 almost same in Q1 of 2008-09. The repayments
of short-term trade credits, however, were very high at US$ 13.2
billion in Q1 of 2009-10 (US$ 7.8 billion in Q1 of 2008-09). As a
result, there were net outflows of US$ 3.1 billion under short-term
trade credit during Q1 of 2009-10 (inflows of US$ 2.4 billion in Q1
of 2008-09).viii) Banking capital mainly consists of foreign assets
and liabilities of commercial banks. NRI deposits constitute major
part of the foreign liabilities. Banking capital (net), including
NRI deposits, were negative at US$ 3.4 billion during Q1 of 2009-10
as against a positive net inflow of US$ 2.7 billion during Q1 of
2008-09. ix) Other capital includes leads and lags in exports,
funds held abroad, advances received pending for issue of shares
under FDI and other capital not included elsewhere (n.i.e.). Other
capital recorded net outflows of US$ 1.6 billion in Q1 of 2009-10.
Hence from the description & facts given above we can see that
the Indias Balance of Payment situation is not very good. The
improvement in the Worlds economy would definitely boost the BOP
position, but the Government too need to take some swift action to
arrest the increase in deficit. Measures to improve balance of
paymentsFew of the suggestions which we here make to improve the
BOP condition are given as below: Reduce domestic
Consumption-Domestic consumption in India is proving resilient as
rest of world slips into recession. This is causing imports to rise
faster than exports. Reducing consumer spending would reduce
imports, but, it may be deemed inappropriate as economic growth may
be more important than balance of payments.Encourage depreciation
of Rupee-Depreciation in the Rupee would make Indian exports more
competitive and imports more expensive. The problem is that with a
global recession many other countries will want to help their
exporters through encouraging a weaker currency.Structural
improvements- Long term supply side policies aimed at increasing
the competitiveness of exports should help improve the balance of
payments for India. However, they will take a long time to work.The
adverse balance of payments can be decreased in 3 ways:1) The
foreign earnings should be increased by export led growth.2) The
imports should be curtailed to essential items only.3) The
expenditure on invisible imports should be minimized.policies
adopted by the government of India since 1950-51India has a chronic
deficit on current accounts. What bridges the gap between payments
and receipts are mainly external aid (especially nonproject
assistance), tourism earnings, and remittances from Indians working
abroad. At the time of independence, higher imports and capital
outflows, led by partition, resulted in significant deficit in the
balance of payments necessitating running down of the accumulated
sterling balances. As the country embarked upon the planned
development in the fifties, rapid industrialization of the country
through development of basic and heavy industries guided the
industrial and trade policies during the First (1951-56) and the
Second (1956-61) Five-Year Plans. 'Import substitution' was
recognized as the appropriate strategy for rapid
industrialization.Export pessimism permeated the policy stance
throughout the early decades of our Planning. The inward looking
industrialization strategy during the first three Plans resulted in
higher rate of industrial growth. However, the signs of strain in
the balance of payments were clearly visible in the Second Plan. As
the import demand surged on account of development of heavy
industries, current account deficit (CAD) in the Second Plan surged
to 2.3 per cent of GDP. The Third Plan reflected the first signs of
rethinking in the policy strategy by dedicating itself to self
sustaining growth, which required domestic saving to progressively
meet the demand of investment and for the balance of payment gap to
be bridged over. Though the devaluation of 1966 brought to the fore
the problems associated with the overvalued exchange rate, it did
not bring immediate desired improvement in the balance of payments
position. In fact, CAD-GDP ratio widened to 2.0 per cent during the
Annual Plans (1966-69).Unlike the export pessimism of the earlier
Plans, the Fourth Plan (1969- 74) visualized an aggressive approach
to export growth for achieving self reliance. As a consequence,
trade policy became the primary instrument for achieving a more
dynamic concept of self reliance than what was prevalent in the
earlier decades. However, it was in the Fifth Plan (1974-79) that
self reliance was recognized as an explicit objective. In the Fifth
Plan, invisibles surfaced as an important element of the current
account with policy attention on tourism and shipping. Discovering
the remittances from Indian workers as a new source of meeting the
growing financing needs, the period witnessed new confidence in the
external sector and prepared the ground work for takeoff to the
exchange rate regime based on a basket arrangement initiated since
1975. The second oil price shock was the precursor of another phase
of strain on India's balance of payments. However, emergence of
rising invisible surplus in India's balance of payments helped
neutralize the widening trade deficit. The Sixth Plan (1980-85)
emphasized the strengthening of the impulses of modernization for
the achievement of both economic and technological self reliance.
The Seventh Plan (1985-90) noted the conditions under which the
concept of self-reliance was defined earlier, particularly in the
preceding Plan. It conceptualized self-reliance not merely in terms
of reduced dependence on aid but also in terms of building up
domestic capabilities and reducing import dependence in strategic
materials. The weaknesses in the Indian economy were exposed by the
Gulf crisis of 1990 and ensuing developments. The current account
deficit rose to 3.1 per cent of GDP in 1990-91. Around the same
time, credit rating of the country was lowered, restricting the
countrys access to commercial borrowings and unwillingness on the
part of normal banking channels to provide renewal of short-term
credit to Indian banks abroad. The severity of the balance of
payments crisis in the early 1990s could be gauged from the fact
that Indias foreign currency assets depleted rapidly from US $ 3.1
billion in August 1990 to US $ 975 million on July 12, 1991. As a
result of the crisis, a conscious decision was taken to honor all
debt obligations without seeking any rescheduling and several steps
were taken to tide over the crisis. The steps undertaken towards
this objective included, among others, pledging our gold reserves,
tightening of non-essential imports, accessing credit from the IMF
and other multilateral and bilateral donors.After the Gulf crisis
in 1991, the broad framework for reforms in the external sector was
laid out in the Report of the High Level Committee on Balance of
Payments, popularly known as Rangarajan Committee, former Governor
of the Reserve Bank of India. After downward adjustment of the
exchange rate in July 1991, following the recommendations of this
Committee to move towards the market-determined exchange rate, we
adopted the Liberalized Exchange Rate Management System (LERMS) in
March 1992 involving dual exchange rate system in the interim
period. The LERMS was essentially a transitional mechanism and a
downward adjustment in the official exchange rate took place in
early December 1992 and ultimate convergence of the dual rates was
made effective from March 1, 1993, leading to the introduction of a
market-determined exchange rate regime. The unification of the
exchange rate of the Indian rupee was an important step towards
current account convertibility, which was finally achieved in
August 1994 by accepting Article VIII of the Articles of Agreement
of the IMF. With the onset of structural reforms in 1991-92,
accompanied initially by severe import compression measures and
determined efforts to encourage repatriation of capital, there was
a turnaround in the second half of 1991-92. Over the next two years
(1993-95), mainly due to foreign investment flows, robust export
growth and better invisible performance, the balance of payments
situation turned comfortable and reserves surged by US $ 14
billion. In recent years the capital account has been dominated by
flows in the form of portfolio investments including GDR issues,
foreign direct investments and to a lesser extent, commercial
borrowings and non-resident deposits, while traditionally, external
aid was the only major component of the capital account. With
significant opening up of the capital account, particularly on
inflows, there were sustained foreign capital inflows since
1993-94. The net foreign assets of the Reserve Bank have also
increased warranting open market operations involving sale of
Government of India securities from the Reserve Banks portfolio and
repo transactions - in order to offset the liquidity created by the
purchases of foreign currency from the market; though use of cash
reserve ratio is not uncommon. A Market Stabilization Scheme (MSS)
was introduced in April 2004 wherein Government of India dated
securities/Treasury Bills are issued to absorb liquidity. Proceeds
of the MSS are immobilized in a separate identifiable cash account
maintained and operated by the Reserve Bank, which is used only for
redemption and/or buyback of MSS securities.DEFICIT IN THE BASIC
BALANCE - DESIRABLE OR UNDESIRABLE!The basic balance was regarded
as the best indicator of the economys position vis--vis other
countries in the 1950s and the 1960s. It is defined as the sum of
the BOP on current account and the net balance on long term
capital, which were considered as the most stable elements in the
balance of payments. A worsening of the basic balance [an increase
in a deficit or a reduction in a surplus or even a move from the
surplus to deficit] is seen as an indication of deterioration in
the [relative] state of the economy. Thus it is very much evident
that a deficit in the basic balance is a clear indicator of
worsening of the state of the countrys BOP position, and thus can
be said to be undesirable at the very outset.However, on further
thoughts, a deficit in the basic balance can also be understood to
be desirable. This can be explained as follows: A deficit on the
basic balance could come about in various ways, which are not
mutually equivalent. E.g. suppose that the basic balance is in
deficit because a current account deficit is accompanied by a
deficit on the long term capital account. This deficit in long term
capital account could be clearly observed in developing countries
which might be investing heavily on capital goods for advancement
on the agricultural and industrial fields. This long term capital
outflow will, in the future, generate profits, dividends and
interest payments which will improve the current account and so,
ceteris paribus, will reduce or perhaps reduce the deficit.Thus a
deficit in basic balance can be desirable as well as undesirable,
as it clearly depends upon what is leading to a deficit in the long
term capital account.
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