Explain the emerging trends in India's balance payments position since 1991

Explain the emerging trends in India's balance payments position since 1991

Emerging trends in INDIA'S BALANCE Of Payments Position since 1991.

INTRODUCTION :

INDIA'S balance of payment position has shown various cyclical changes since the first five year plan (1951-52)

The first five year plan was the only period that did not experience problems related to balance of payments position

Since the second five year plan, India has withessed problems of varying intensity as reflected by the balance of payments position and by the end of 1980, the situation reached a crisis point. The trade account deficit was 3.2% of the GDP whereas the current account deficit storl at 2.2%. the deficit was financed by resorting to commercial borrowing .

BACKGROUND : CRISIS AND RECOVERY (1990S)

CRISIS : The Gulf crisis in the 1990s led to an adverse effect on the already worse balance of payment position whereby the current account deficit increased to 3.1% of GDP in 1990-91.

The foreign exchange reserves also began to decline they declined from $3.1 billion in August 1990 to $ 896 million in January 1991-

Thus , the Government had to take recourse to the IMF to overcome the balance of payments position

By June 1991, a default on payments had become a serious possibility for the first time in Indian history. It had become a crisis of confidence in the Government's ability to manage the balance of payments position.

RECOVERY: In June 1991, the new government led by Mr. P.V. Narsimha Rao with Dr. Manmohan Singh as the finance Minister and Mr. P. Chidambaram as the commerce Minister to several measures for macroeconomic stabilization and structural reforms in industrial and trade policies.

There was also an adjustment made in the foreign exchange rate.

These measures slowly stabilized the balance of payments position and restored international confidence. The year 1991-92 ended with current account deficit of less than 1% of GDP.

INDIA'S balance of payments position since 1991 :

The balance of payments position can be reflected from :

Trade balance

Current account balance

Capital account balance

Foreign exchange reserves

Trade balance :

Trade balance has always been in deficit since imports have always exceeded exports. The following are the trade deficit figures :

1990-91: us $ 9438 million

2000-01 : us $ 12460 million

2008-09 : us $ 118650 million

Current account balance :

Current account includes (i) non- factor services like travel, transport, insurance, financial services, communication services, business services, software service (IT and IT enabled services),

ii) income in the form of dividend and interests from investments abroad,

iii) private transfers and

iv) official transfers

our current account balance has also, always shown deficit except years 2001-02, 2002-03 & 2003-04.

However, earnings from non-factor services have played a vital role in bringing down the current account deficit.

The following are the current account deficit figures :

1990-91 : us $ 9680 million

2000-01 : us $ 2666 million.

2008-09 : us $ 28728 million

Capital Account Balance :

The deficit in the current account balance is adjusted by capital account receipts or by reducing foreign exchange reserves.

External assistance like repayment of loans to IMF have finally become nil, though commercial borrowings are on an increase.

The foreign investment in the form of FDI and FIIs have always been positive.

1990-91 us $ 103 million

2007-08 : us $ 43326 million

2008-09 : us $ 3467 million

The net capital account balance has always been positive after covering the current account deficit , the excess is added to the foreign exchange reserves.

However, when current account deficits are larger than capital account surpluses, foreign exchange reserves are also used to cover these deficits.

Foreign Exchange Reserves :

India's foreign exchange reserves are held in the form of foreign currency assets (FCAs), gold, special drawing rights (SDR)and reserve tranche position (RTP) in the International Monetary fund. (IMF).

Through RBI's intervention foreign exchange flow can be brought in or absorbed from the market.

Foreign currency assets are maintained in the form of us dollar, pound, euro, sterling, Australian dollar, Japanese yen, etc.

However, foreign exchange reserves are expressed in us dollar only.

Foreign exchange reserves were as follows :

1991 : $ 5.8 billion

1995 : $ 25.2 billion

2008 : $ 314.6 billion

(March) 2009 : $252.0 billion

(December) 2009 : $ 283.5 billion

CAUSES for deficit in India's BOP position :

The important reasons for deficit in India's BOP position can be cited as follows :

i ) Rise in Imports :

The rise in imports is the most important factor for deficit in India's balance of payments position.

India's imports increased significantly from $ 27915 million (1990-91) to $ 307651 million (2008-09)

Imports mainly consisted of :

Capital goods (initially for industrialization and later for modernization and upgradation of technology)

Cereals

Edible oils ( major item in imports )

The reasons for rapid rise in imports are building industrial base (in the early stages ), increase in export related imports (gems, jewellery, capital goods ), increase in imports of industrial raw materials, rise in the price and imports of POL products, etc.

ii)devaluation and depriciation of the rupee

the devaluation and depriciation of the rupee have led to an increase in the price of imports

Exports have become cheaper, the low price and income elasticities of demand for exports have resulted in slow increase in exports.

iii) slow rise in export earnings :

Exports earnings rose, however, they were not sufficient enough to meet the rising imports. Thus, rise in exports has neither been substantial nor continuous. The growth in exports has not been sufficient enough to finance the rising imports.

iv) Competition from other countries:

India's exports earning rose but they were not sufficient enough to meet rising imports. India's exports are affected by competition from other countries like Philippines, Indonesia, Malaysia, Latin American and African countries. Recently china has become a major competitors.

v) Debt Service :

the balance of payments problem has also aggravated due to the rising obligation of ammortisation payments in 2008-09, debt service ratio was 4.4 % with the ever increasing imports and slow pace of exports, the most effective solution for India's balance of payments problem is cost reduction and competitiveness in global warket.

iv) Appreciation :

the recent appreciation of the rupee has made exports costlier and imports cheaper. This may also add to the balance of payment problem.

INDICATORS OF BALANCE PAYMENTS

There are various indicators that bring out the strengths and weaknesses of a country's balance of payments.

These include :

i)Ratio of exports and imports as a % of BOP :

1990-91 : 66.2 million us dollar

2003-04 : 82.9 million us dollar

2008-09 : 61.4 million us dollar

Though imports and exports have increase, the growth in imports has always been MORE than growth in exports.

ii)import cover of foreign exchange reserve (FER) :

1990-91 : 2.5 months

2003-04 : 16.9 months

2008-09 : 9.8 months

The global economic recession (2007-2009) brought down the foreign reserves. However, by September 2009, there was a marked improvement as the import cover of FER increased to 12.4 months.

iii)Debt Flow :

debt flow on capital account consisting of NR deposits, external commercial borrowings and external assistance had increased. This is not a very encouraging sign.

iv) external Debt :

1990-91 : 28.7 %

2008-2009 : 20.5%

The decline in external debt indicates less dependence on foreign countries and institutions. The global economic crisis (2007-09) affected India to a lesser extent due to the residence of the Indian economy.

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