CHAPTER VIII SUMMARY, CONCLUSIONS AND SUGGESTIONS

Transcription

1 CHAPTER VIII SUMMARY, CONCLUSIONS AND SUGGESTIONS 8.1 Summary 8.2 Conclusions 8.3 Policy Suggestions 8.1 SUMMARY Balance of Payments is said to be a systematic record of all international economic transactions during a given period of time, usually a year. The study of balance of payments represents macroeconomic aspect of international economics. The main objective of the present study (as given in Chapter I) is to consider a review of the measures to correct disequilibrium in India s balance of payments from 1970 to Besides this the study has also focused on analyzing the effects of various measures on the components of balance of payments. The present chapter deals with a brief summary or overview of the findings to prove the hypotheses, policy measures and conclusions. To consider the evolution of the concept of balance of payments, a broad survey of the different theories of international trade was undertaken.(refer to Chapter II). The analysis in this chapter revealed that the concept of balance of payments or balance of trade was evolved for the first time in the writings of mercantilists. However, they failed to address the issues such as gains from trade, structure of trade and terms of trade. Further, it was observed that the Ricardian theory and Heckscher Ohlin theory were relevant and were able to explain the pattern of 366

2 world trade till the first half of the twentieth century. Later on, several economists modified the Heckscher Ohlin theory by introducing the role of economies of scale, imperfect competition, differences in technology etc. For example, Posner s technological gap and Vernon s product cycle theory were the two prominent theories which analysed the effect of technical changes on the pattern of international trade. The intra industry trade models developed in late1970s emphasized the view that economies of scale and imperfect competition can give rise to trade even in the absence of comparative advantage. Some of the important intra- industry models were developed by Krugman (1979), Lancaster (1980), Helpman & Krugman (1985), etc. In the second half of 1980s, strategic trade policy models were developed which included oligopolistic competition. In this context, notable contributions were made by Krugman (1984) and Brander & Spencer (1985). To conclude, the new theories which were developed after 1970s and 1980s are quite capable of explaining the pattern of world trade today. After independence for almost fifty years or so, India s trade policy was inward oriented with an objective to achieve rapid industrialization through import substitution. This strategy covers the period from First Five Year Plan ( ) to the Seventh Five Year Plan.( ). However, from 1990 onwards there was a major shift in the policy stance, when the country adopted outward oriented trade strategy. An in depth analysis of India s trade policy shows that there were certain shifts in the policy stance from time to time and it could be divided into three different phases such as - Phase I Import Restriction and Import Substitution (From 1950 s to 1970s), Phase II Export Promotion & Import Liberalisation (From 1970s to 1990s), and Phase III Outward Orientation (From 1990 onwards). 367

3 Due to the adoption of Economic Planning, trade and industrialization policy were subject to plan priorities. Phase I of trade policy covers the period of three Five Year Plans ( to ) and the Three Annual Plans ( ). The policy of import restriction and import substitution was formulated by keeping in view the limited foreign exchange reserves of the country, shortage of essential consumer goods, requirements of capital goods, etc. Besides this, the country had to import food grains to overcome shortages of food grains. Given the acute shortage of foreign exchange most of the time, policymakers opted for direct allocation of foreign exchange among different users and uses through import licences. The import substitution strategy was also supported by appropriate monetary and fiscal policies and by using tariff and non tariff barriers such as licences & quotas. Phase I of trade policy was also characterized by important features like (a) devaluation of rupee in June 1966, (b) adoption of new agricultural strategy to achieve self sufficiency in the production of food grains, (c) three wars (1962 with China, 1965 & 1971 with Pakistan), and (d) two severe successive droughts in and The trade policy during phase I, affected adversely exports reflecting a poor export growth. It was observed that there was a consistent fall in exports as a proportion of GDP until the early 1970s. For instance, exports as a per cent of GDP fell from 6.4 per cent in First Plan to 4.2 per cent by the end of three Annual plans. The effect on trade deficit showed that the average trade deficit to GDP ratio which was 1.1 per cent in the First Plan increased to 3.3 per cent in the Second Plan and thereafter decreased to 2.2 per cent in the Third and the three Annual Plans. Similarly, the average current account deficit to GDP ratio which was 0.1 per cent of GDP during the First Plan increased to 2.4 per cent in the Second Plan. It then remained around 2.0 per cent of GDP during the Third and the three Annual Plans. 368

4 The period from 1950s to 1970s also reflected stagnation in Real GDP growth rate, which ranged from 3.5 per cent to 4.0 per cent per annum. However, one of the positive impact of trade policy was seen in the context of industrial growth. For instance, the industrial growth rate which was 5.7 per cent per annum in the First Plan, increased to 7.2 per cent per annum in the Second Plan and further to 9.0 per cent per annum in the Third Plan. Phase II of export promotion & import liberalization covers the period from Fourth Plan ( to ) to Seventh Plan ( to ). During seventies, several export promotion measures were implemented to generate higher exports on a sustained basis. This export promotion measures implied a gradual shift in the policy stance from import substitution to export promotion. Further, 1980s marked the beginning of import liberalization wherein a more liberal policy of imports of capital goods and technology was adopted. Besides this, the changes in trade policy were also influenced by the recommendations of the Alexander Committee (1978), Tandon Committee (1980) and Abid Hussain Committee (1984). In a nutshell, these Committees emphasized on-simplification of import licensing procedures, adoption of export promotion measures, phased reduction of tariffs, announcement of trade policies for longer period etc. The recommendations given by the above three Official Committees were implemented by the Government in due course of time. With respect to components of balance of payments it was observed that in the Fourth Plan period ( ) the average current account deficit to GDP ratio was 0.3 per cent which turned into a surplus of 0.1 per cent in the Fifth Plan period ( ). Hence, the Fifth Plan period was considered as golden period from India s balance of payments point of view. It is pertinent to note that the balance of 369

5 payments remained comfortable in the Fifth Plan in spite of the first oil shock of The economy was able to manage the first oil shock fairly quickly due to (a) an improvement in export performance in the first half of 1970s, (b) slow expansion of imports, (c) increase in invisible receipts in the form of private transfers, (d) increase in foreign aid especially from IMF, and (e) restrictive fiscal & tight monetary policy. The second oil shock which occurred in 1979 had a serious negative impact on India s balance of payments. The surplus in the current account in the Fifth Plan turned to deficit in the Sixth Plan. For instance, the average CAD/GDP ratio was 1.5 per cent in the Sixth Plan, which further increased to 2.2 per cent in the Seventh Plan. Some of the important reasons which led to deterioration in the balance of payments in the Sixth & Seventh Plan were (1) stagnation in exports after , (2) increase in import prices of crude petroleum, fertilizers, etc.(3) increase in imports of capital goods (3) severe droughts of (4) fall in invisible receipts, (5) expansionary monetary & fiscal policy, and (6) non concessional borrowing. The second oil shock was managed through measures such as import substitution in oil, restraining domestic consumption, loan from IMF and other multilateral agencies. With reference to the performance of exports during Phase II it is observed that in the first half of 1970s exports performed well due to (a) intensified export promotion efforts by the government; (b) The emergence of Bangladesh as a trading partner in 1971; (c) depreciation of NEER & REER (d) expansion in world trade & (e) emergence of new markets such as OPEC. Similarly, during the period from second half of 1970s to first half of 1980s exports performed poorly because of - (a) 370

6 drop in the rate of growth of agricultural production; (b) increase in domestic demand for manufactured products; (c) inflation; and (d) infrastructural bottlenecks. With reference imports it is observed that our import bill mainly increased because of (a) the two oil shocks;(b) increase in imports of food grains and defence equipments; (c) increase in the imports of raw materials, semi finished goods, manufactured goods and capital goods; and (d) increase in import intensity of exports. The second half of 1970s was characterized by massive expansion of foreign exchange reserves due to increase in net invisibles, foreign aid and private transfer payments. One of the important features which affected the India s balance of payments in the decade of eighties, was the emergence of large fiscal deficits accompanied by current account deficits. The average CAD/GDP ratio was 2 per cent from to , while GFD / GDP ratio was 7 per cent. During the first half of 1980s, the average CAD / GDP ratio was 1.65 per cent while the FD / GDP ratio was 6.30 per cent. However, the second half of 1980s showed a remarkable increase in both the deficits. For instance, the average CAD /GDP ratio was 2.35, while GFD / GDP ratio was 7.70 per cent. The trends in fiscal deficit reflect that during to , the fiscal policy was highly expansionary. Thus, the movements in current account deficit and fiscal deficit depicted the existence of twin deficit phenomenon. In general, it was observed that up to end of Sixth Plan, invisibles played an important role in financing trade deficit. However, the situation changed from the Seventh Plan onwards when there was a rapid decline in net invisible receipts. For instance, in the Sixth Plan 56 per cent of the trade deficit was financed by invisibles while in the Seventh Plan only 25 per cent of the 371

7 trade deficit could be financed by invisibles. The decline in net invisible receipts led to greater dependence on external capital. It was observed that up to the end of Sixth Plan, external assistance available on concessional terms was the main source of financing current account deficit. For example, during the Sixth Plan period, all the three sources taken together i.e. external assistance, commercial borrowings and NRI deposits financed 74 per cent of current account deficit. However, the situation changed drastically in the Seventh Plan when all the sources together financed 87 per cent of current account deficit. Moreover, all these sources were costly sources of financing which further led to the problem of external debt. It was observed that India s external debt to GDP ratio increased from 12 per cent in to 26 per cent in Similarly, the debt service ratio increased from 9.5 per cent in to 35 per cent in During the trade policy regime of Phase II (1970s to 1990s), the overall industrial development was characterized by industrial deceleration & structural retrogression (1965 to 1980) and industrial recovery. (1981 to 1990). The rate of industrial growth fell steeply from 9.0 per cent per annum during the Third Plan to a mere 4.1 per cent per annum during the period 1965 to The average industrial growth rate was 6.1 per cent per annum during the Fifth Plan period. Besides this, there was also structural retrogression in the industrial sector during the period 1965 to Some of the common causes for industrial deceleration were (a) wars in 1965 & 1971 (b) two severe droughts of & , (c) first oil shock of 1973 (d) decline in public investment and (e) infrastructural constraints. However, the adoption of liberal industrial and trade policies & increase in infrastructure investment during the Sixth & Seventh Plan led to recovery of industrial growth. For example, the 372

8 industrial growth rate was 6.4 per cent per annum in the Sixth Plan which further increased to 8.5 per cent per annum during the Seventh Plan. With reference to inflation it was observed that it was around 9.0 per cent per annum in 1970s, which slightly reduced to 8.0 per cent per annum in the 1980s. The Real GDP growth rate showed some improvement as it nearly doubled from 2.9 per cent per annum in 1970s to 5.6 per cent per annum in 1980s. A detailed study of India s balance of payments reveals that deterioration in India s balance of payments started from the Seventh Plan onwards and ultimately reached to a critical position in the year Moreover, there was a consensus among the economists that the prelude to the crisis was the decade of eighties. Thus, the year can be considered as the most difficult year from the India s balance of payments point of view. All the major macroeconomic indicators reflected the presence of a balance of payments crisis. For instance, the CAD/GDP ratio increased from 2.3 in to 3.1 per cent in , which was clearly unsustainable. The GFD / GDP ratio was more than seven per cent during the two years , and The foreign exchange reserves were just sufficient to cover two and half months of imports during the two years i.e and The average rate of inflation was 7.5 per cent in , which went up to 10 per cent in the year and further increased to 13.0 per cent in The Real GDP growth rate which was 6.5 per cent in , went down to 5.5 per cent in , and further fell to 2.2 per cent in The debt indicators like debt stock to GDP ratio and debt service ratio were also quite high during the said period. For instance, debt stock to GDP ratio was 28.5 in and it further went up to 38.5 in The debt service ratio ranged between 30.0 and was in and In a nutshell, the country s macroeconomic position was critical 373

9 in characterized by unsustainable CAD/GDP ratio, high GFD / GDP ratio, low foreign exchange reserves, high inflation, low Real GDP growth rate and high debt stock to GDP ratio. It was observed that the balance of payments crisis of was the result of external as well as internal factors. The break down of Soviet bloc and Iraq Kuwait war were considered to be the main external factors leading to the crisis. While fiscal indiscipline, political uncertainty and instability, loss of investor s confidence, fall in invisibles surplus and rising external debt were considered to be the main internal factors. However, many economists have considered macroeconomic imbalances as the major cause behind the crisis. To overcome the balance of payments crisis several reforms were introduced in July 1991 which were a mixture of macroeconomic stabilization and structural adjustment. Major reforms were introduced in fiscal, financial, industrial and trade sectors. The aim of fiscal reforms was to correct fiscal imbalances and restore fiscal discipline. The monetary policy reforms included reduction in SLR and CRR, rationalizing the structure of interest rates, etc. Reforms in the banking sector were based on the recommendations of Narasimham Committee. Reforms in the industrial sector included - deregulation of industry, abolishing of industrial licensing for major industries, amendment of MRTP Act and disinvestment of public sector enterprises. As the roots of crisis were related to trade and balance of payments, several reforms were introduced in the trade sector. Thus, as far as the foreign trade sector is concerned, the year 1991 is a watershed because massive trade liberalization measures adopted since this year mark a major departure from the relatively protectionist trade policies pursued in earlier years. In the broader sense, the trade policy package was essentially an outward oriented one. Some of the trade policy 374

10 reforms introduced were (a) reduction in tariffs and phasing out quantitative restrictions, (b) decanalisation, (c) policy for trading houses, and (d) concessions and exemptions for exporters etc. Devaluation of rupee by nearly 20 per cent in July 1991 was yet another important step undertaken to improve the balance of payments situation. Further, from March 1993 onwards a system of market determined exchange rate was adopted. Current account convertibility was finally achieved in August 1994 when the Reserve Bank further liberalized payments and accepted obligations under Article VIII of the IMF. The reforms also included promotion of foreign investment in India. The Indian economy in general and external sector in particular started realizing the beneficial effect of reforms from onwards. Some of the beneficial effects are as follows: The improvement in foreign trade ratios such as exports / GDP, imports / GDP, and trade / GDP reflect that there has been an increase in India s trade openness after the reforms. India s exports / GDP ratio increased from 4.6 per cent during the decade of 1980s to 7.8 per cent in 1990s. The imports / GDP ratio increased from 7.2 per cent to 9.3 per cent during the same period. India s trade to GDP ratio during the period from to was 11.8 per cent, which went up to 17 per cent during the period from to Further from to , there has been increase in all the three ratios. For instance, the exports / GDP ratio was 11.4, imports / GDP ratio was 15.3 and trade / GDP ratio was A key aspect of the trade reforms of the 1990s was the reduction in import duties. It is observed that over a period of time the peak rate of import duties has been reduced from 150 per cent in to 25 per cent in 375

11 Besides this, the number of basic duty rates have come down drastically from 22 to 4 from to The economic reforms have also resulted into improvement in terms of trade (both net & income) over a period of time. With reference to exports it was observed that after the introduction of reforms, in the first half of 1990s there was a significant improvement in India s export performance both at the overall level and across commodities. However, there was a slowdown in exports performance in the second half of 1990s because of factors such as slowdown in economic activity, fall in demand due to East Asian crisis, imposition of Non- tariff barriers by developed countries, and weakening of overall demand and world trade volume. The structure and composition of exports reveals that the share of primary exports in total exports has decreased from 24.0 per cent in to 17.7 per cent in , while the share of manufactured exports in total exports has increased from 72.9 per cent in to 80.7 in This indicates that the country has gradually transformed from an exporter of primary products to an exporter of manufactured products. The exports of petroleum products have shown interesting results. The share of petroleum products increased from 0.4 per cent in , to 2.9 per cent in , and further to 14.8 per cent in In the case of imports, petroleum and petroleum products have been the most item among bulk imports. The share of this item was 25.0 per cent in In its share marginally went up to per cent. In , its share went up to per cent. It is pertinent to note that, the 376

12 volume of such imports has grown significantly on account of increase in domestic consumption and the stagnation in domestic crude oil production. In the case of non bulk imports capital goods occupy a dominant place in The percentage share of imports of capital goods have remained almost stable during the post reform period. For instance, its share was 24.2 per cent in By its share decreased to per cent, and again by , its share again went up to per cent. Hence, with respect to imports it can concluded that, there has been compositional shifts in the structure of India s imports towards higher technology intensive and export oriented products during the 1990s. Direction wise analysis of the Indian exports indicates an unchanged position in respect of OECD group, increasing prominence of OPEC and the developing countries of Asia, Africa and Latin America. Direction wise analysis of imports indicate that subsequent to the opening up, India s import have been sourced from a wide range of countries. The imports from traditional partners like Germany, Japan, UK & Australia are reduced, while new import partners from Africa and East Asia (including China) are gaining importance. Invisibles have been considered as the most dependable source of financing country s trade deficits. It is found that the importance of invisibles increased tremendously after the initiation of trade reform measures in In , net invisibles as a percentage of GDP were negative i.e. 0.1 per cent. However, within a few years after reforms, they reached to a positive figure of 1.8 per cent in By , net invisibles 377

13 almost doubled and reached to 2.9 per cent of GDP. Further, within a span of seven years, net invisibles went up to 5.8 per cent of GDP in On an average, 63 per cent of trade deficit was financed by net invisibles from to Earnings from invisibles exceeded the deficit on trade account in , and , as a result there was a surplus in current account in these years. Plan wise financing of trade deficit indicates that in the Seventh Plan ( ), invisibles were able to finance only 25 per cent of trade deficit. But, in the Eighth Plan ( ), invisibles were able to finance on an average, 58 per cent of trade deficit. This financing increased to 82 per cent in the Ninth Plan ( ), and further to 99 per cent in the Tenth Plan ( ). Hence, it can be concluded that invisibles have played an important role in financing the trade deficit in the post reform period. Our analysis shows that during the post reform period from to the average Net Invisibles / GDP ratio was 2.75 per cent. During the same period, our moving average analysis shows a rising trend. Hence, we can conclude that invisibles have played an important role in narrowing down the CAD. The high levels of current account deficits maintained during the 1980s had reached to 3.1 per cent of GDP, which was well above the sustainable level for India. However, the external sector policies implemented in 1991 ensured that the current account deficit remained around one per cent of GDP and was comfortably financed. A detailed study of CAD / GDP ratio revealed that this ratio, reduced from 3.1 per cent in to 0.3 per cent in the year The average 378

14 CAD / GDP ratio works out to be 1.02 per cent from the period to Further, there was a current account surplus for three consecutive years from to Hence, it was the first time after independence there was a current account surplus in three consecutive years. In , the CAD / GDP ratio was 1.1 per cent. Our analysis shows that the average CAD/GDP ratio during the period to is 0.55 per cent. At the same time, all the moving averages show a falling trend during the said period. In an open economy framework, maintaining the current account deficit at a sustainable level is crucial. The sustainability of current account depends upon external as well as domestic macroeconomic factors. In the recent years, a number of criteria are used to assess sustainability. Some of the indicators which are used to assess current account sustainability are - (1) Trade deficit / GDP ratio, (2) CAD / GDP ratio, (3) GFD / GDP ratio, (4) Private sector : S I gap, (5) External debt / GDP ratio, (6) Short term debt / total debt ratio (7) Non debt capital flows /total capital flows (8) Debt service ratio, (9) Changes in Real Effective Exchange Rate (REER),and (10) Import cover. All the operational indicators of current account sustainability for India indicate a steady improvement since the 1990s, except for the ratio of fiscal deficit to GDP. Thus, the sustainability of the current account was ensured by a policy choice for non debt flows and emphasis on the consolidation and reduction of external debt. To conclude, on the basis of trends in the current account in the post reform period we accept the hypothesis that in spite of trade liberalization the current account deficit has been within manageable levels. 379

15 The trends in fiscal deficit and current account deficit in the pre reform period depicted the existence of twin deficit phenomenon. Further, most of the empirical studies showed that fiscal deficit cause current account deficits. Our analysis also shows a high degree of positive correlation between CAD & FD in the pre reform period from to However, the post reform period especially since mid 1990s shows that the relationship between these two deficits has narrowed down. It is observed that even though fiscal deficit has remained high, the current account deficit has been reduced implying that a major part of the fiscal deficit has been absorbed by a surplus in domestic saving of the private sector. For example, the average current account deficit from to works out to be 1.02, while the average fiscal deficit is 5.67 during the same period. Hence, it is clear that although fiscal deficits remained inflexible downwards, they did not spill over into the external sector during the 1990s. Our analysis shows a weak negative correlation between CAD & FD in the post - reform period. The average FD/GDP ratio is 5.30 per cent while the average CAD / GDP ratio is 0.55 per cent, during the period to During 1980s, the widening current account deficits were mainly financed by costly sources such as external commercial borrowings, NRI deposits and loans from IMF. However, in the post reform period, the strategy has been to encourage long term capital inflows and discourage short term volatile flows. Thus, a cautious approach has been adopted towards capital flows in the post reform period. The trends in capital account from to revealed that barring and , the surplus 380

16 in capital account has been sufficient to wipe out the deficit in current account and create an overall surplus in the country s balance of payments. The four main components of capital account are (a) foreign investment, (b) external assistance (c) external commercial borrowings, and (d) NRI deposits. Foreign investment includes foreign direct investment (FDI) and foreign portfolio investment (FPI). The policy makers realized that foreign investment can play an important role in financing the current account deficit. Hence, a major policy thrust towards attracting foreign direct investment (FDI) was outlined in the New Industrial Policy Statement of Since then continuous efforts have been to attract foreign investment in India in the form of direct investment and portfolio investment. Responding to the policy efforts, the foreign investment inflows into India (direct and portfolio) picked up sharply in and have been sustained at higher level barring , due to East Asian crisis. For example, Plan - wise analysis of foreign investment reveals that during the Eight Plan ( ) the average foreign investment was ` crore, which increased to ` in the Ninth Plan ( ). InTenth Plan ( ) it more than trebled to ` crore. With respect to external assistance it is found that the reliance on this source has been continuously declining in the post reform period. On the contrary, the reliance on costly sources such as external commercial borrowings and NRI deposits has been rising. Plan - wise data indicates that average ECBs were `.3720 crore in the Eighth Plan, which increased to `.9425 crore in the Ninth Plan and further to ` crore in Tenth Plan. 381

17 Similarly, average NRI deposits were `.5226 crore in Eighth Plan, which increased to `.7756 crore in the Ninth Plan and further to ` crore during Tenth Plan. Even though there has been an increase in It is pertinent to note that even though in absolute terms ECBs and NRI deposits have increased in post reform period,(from Eighth Plan to Tenth Plan) the overall policy has been to keep their maturity periods long and costs low. To conclude, the evolution of capital flows over the 1990s reveals a shift in emphasis from debt to non debt flows with the declining importance of external assistance, ECBs and NRI deposits and the increased share of foreign investment. For instance, the share of foreign investment in capital account increased from 50.0 per cent in the Eighth Plan to 73.0 per cent in the Tenth plan. While the share of NRI deposits in capital account declined from 19.0 per cent in the Eighth Plan to 11.0 per cent in the Tenth Plan. Our analysis shows that the capital inflows in the form of foreign investment during the period from to are 58.0 per cent, while external assistance is per cent, ECBs are per cent and NRI deposits are per cent. Hence, we accept the hypothesis that there has been a compositional shift in the capital account of the balance of payments in the post reform period. Management of external debt and improvement in debt sustainability indicators can be considered as one of the important achievement in the post reform period. For instance, external debt to GDP ratio has come down from in 1992 to 22.0 in 2000 and further to in 2007 and the debt 382

18 service ratio has come down from in 1992 to in 2000 and to 4.80 in In India, the exchange rate system has gone a paradigm shift from a system of fixed exchange rates (until March 1992) to a market determined regime since March The overall experience with the market determined exchange rate system has been satisfactory. India s approach to reserve management until the balance of payments crisis of 1991, was based on the traditional approach i.e. to maintain reserves in relation to imports. However, by adopting a multiple indicator approach there has been a paradigm shift in India s approach to reserve management in the post reform period. The trends in select indicators of reserve adequacy like import cover, short term debt to reserves and external debt to reserves show a progressive improvement in the post reform period. For instance, the traditional trade based indicator of reserve adequacy i.e. the import cover of reserves (foreign currency assets) which was just 2.5 in 1991, increased to 8.2 in 2000 and further to 12.5 in Similarly, the ratio of short term debt to reserves has gone down from in 1991, to in 2000 and further to 5.8 in The external debt to reserves has gone down from in 1991 to in 2000 and further to in In the post reform period the country s foreign exchange reserves (excluding Gold & SDRs) have reflected a phenomenal growth. The country s foreign exchange reserves have increased from `.4388 crore in to ` crore in and further to ` crore in

19 With respect to the impact of reforms on inflation, it is observed that during the first half of 1990s the average WPI inflation rate was 10.0 per cent per annum, while the second half of 1990s reflected a declining trend and it was 5.0 per cent per annum. After the introduction of reforms in July 1991 major changes were also introduced in the industrial sector The industrial growth rate shows a mixed picture in the post reform period. For instance, the average industrial growth rate which was 7.4 per cent per annum during the Eighth Plan declined to 5.0 per cent per annum in the Ninth Plan. However, in Tenth Plan it again recovered and was 8.0 per cent per annum. The macroeconomic crisis of 1991 also affected the Real GDP growth adversely. The Real GDP growth which was 5.6 per cent per annum in sharply went down to 1.3 per cent per annum in However, over a period of time, the reforms introduced in July 1991 seems to have contributed to economic growth of the country. The data on Real GDP growth reveals that during the Eighth Plan period, the average Real GDP growth rate was 6.5 per cent per annum, which reduced to 5.5 per cent per annum in the Ninth Plan. The fall in the growth rate in the Ninth Plan could be attributed to the factors like -East Asian financial crisis, slowdown in agricultural growth, fluctuations in industrial growth rate, etc. In the Tenth Plan, once again there was revival of economic growth and the average growth rate was 7.5 per cent per annum. Capital account convertibility refers to the freedom of currency conversion in relation to capital transactions in terms of inflows and outflows. Full convertibility means that restrictions on capital account will be withdrawn 384

20 by a country. India has adopted a gradual approach towards capital account liberalization, which is based on the Report of the two Committee s on Capital Account Convertibility which were chaired by Shri. S. S. Tarapore. Finally, it is observed that the introduction of major reforms in fiscal, financial, industrial and trade sectors in 1991 have resulted in (1) increase in trade openness, (2) satisfactory performance of exports, (3) increase in net invisibles (4) maintaining a sustainable level of current account deficit,(5) increase in non debt creating flows like - foreign investment and decrease in debt creating capital flows like external commercial borrowings & NRI deposits, (6) improvement in key indicators of external debt (7) satisfactory management of exchange rate (8) phenomenal increase in foreign exchange reserves & improvement in indicators of reserve adequacy (9) control of inflation (10) a satisfactory level of industrial growth (11) maintaining Real GDP growth of about 5.5 per cent per annum and (12) a cautious approach towards capital account liberalization. Further, a detailed study of India s Balance of Payments from to indicates that the country has been able to achieve overall surplus in balance of payments in all the years except in and On the basis of above we accept the hypothesis that the various measures undertaken to correct disequilibrium in balance of payments have proved successful. 385

21 8.2 CONCLUSIONS Some of the broad conclusions which can be derived from the present study are as follows: (1) In a broader sense, after independence for almost forty years or so India adopted inward - oriented strategy with a view to achieve rapid industrialization through import substitution. This strategy covers the period from First Five Year Plan ( ) to the Seventh Five Year Plan.( ). (2) The growing fiscal imbalances in the Seventh Plan leading to high fiscal deficits and the spillover of the same into high current account deficits led to CAD / GDP ratio of as high as 3.1 per cent resulted into the balance of payments crisis of Besides this, the country had the problems of - high inflation, low foreign exchange reserves, political uncertainty & instability, loss of investors confidence, high level of external debt etc. (3) The balance of payments crisis of 1991 led the policy makers to review the trade strategy and as a result outward oriented strategy was adopted. The government undertook several reforms in the fiscal, financial, industrial and trade sectors. (4) The results of the reforms are reflected in the post reform period which covers the period from Eighth Plan (1992 to 1997) to Tenth Plan ( ). (5) Some of the major achievements of trade sector reforms are: (a) increase in trade openness, (b) satisfactory export performance, (c) maintaining a reasonable level of current account deficit, (d) increase in non debt creating capital flows like foreign investment, (e) improvement in indicators 386

22 of reserve adequacy and external debt, (f) control of inflation, (g) satisfactory industrial and overall Real GDP growth. (6) Besides this, considering the benefits and costs of capital account liberalization, the country has followed a cautious approach towards capital account convertibility. Full capital account convertibility is expected to be achieved in the years to come. (7) One of the major objective of reforms was to achieve fiscal consolidation. The progress of fiscal correction shows mixed result in 1990s. No doubt there was some reduction in fiscal deficit in the first half of 1990s. But, in the second half of 1990s the process once again reversed due to industrial slowdown and the impact of Fifth Pay Commission s award. Moreover, this fiscal consolidation was achieved by cutting down capital expenditure instead of current expenditure. (8) One of the important developments which took place in the second half of 2007 which affected the entire world was the US sub prime crisis, which subsequently became a global financial and economic crisis. This global economic crisis started affecting India from the beginning of The crisis led to rise in CAD / GDP ratio, rise in fiscal deficit, rise in inflation, rise in capital outflows, etc. At the same time it led to fall in foreign investments, depreciation of rupee, and a reduction in industrial growth rate. To overcome the crisis, both the Government of India and RBI undertook several measures. For instance, the Government of India undertook a fiscal stimulus package and RBI announced reduction in CRR, SLR and other key policy rates. However, it can be concluded that three factors helped to manage the crisis. They were (a) a well regulated financial sector, (b) 387

23 gradual and cautious opening up of capital account, and (c) the availability of large stock of foreign exchange reserves. 8.3 POLICY SUGGESTIONS In the context of present study the following policy measures are suggested - 1) There are many structural weaknesses in the export sector such as low efficiency and productivity in resource use, lack of modern technology, lack of proper planning, marketing and decision making. Hence it is utmost important to remove the structural weaknesses in the export sector. 2) On the export front it is expected that textiles, engineering goods and processed food items will be the major export drivers. Hence efforts should be mobilized to increase the production and exports of these commodities. 3) Besides this there still exists a vast scope for exporting horticultural products such as fruits and flowers. This can be done by developing appropriate infrastructure and technology which is required for horticultural products. 4) Indian exports can be made more competitive by faster delivery of export consignments, post sale services, strengthening infrastructure, etc. 5) People all over the world are becoming Quality conscious and governments are laying down rigid Quality standards for all food items and fresh agricultural products. Hence, it is imperative that the highest attention should be given to ensure quality of our agricultural products meeting domestic and international standards. For this purpose, it is necessary to educate the farmers, food processors, etc. through training programs, workshops, etc. 6) There are various incentive schemes which are available to exporters. All these schemes are very cumbersome and time consuming, and various 388

24 agencies are involved. These procedures should be simplified with the use of information technology and policies to promote self certification by export houses should be encouraged. Preferential treatment should be granted to exporters with a good track record. 7) The incentive schemes to promote exports should be designed in such a way that which could generate maximum growth of exports. Export incentives should be given to those items which have achieved high growth rates for a period of ten years or so. 8) There is a scope to diversify Indian exports geographically. This can be done by increasing exports to non traditional markets such as Africa, South Asia and South East Asia. 9) Import liberalization should be based on careful planning and should lead to growth and higher productivity of Indian industry. The import substitution industries must be given sufficient opportunity to improve their productive capacity and competitiveness. 10) Trade liberalization and tariff reforms have provided necessary access to Indian companies to acquire best inputs available at competitive prices. Hence, it is necessary to continue with the tariff reforms in future. 11) The level of capital flows in the post reform period suggests that some widening of CAD / GDP ratio could be financed without much difficulty. However, a careful monitoring of this ratio is necessary so that it should not once again reach to an unsustainable level of beyond 3.0 per cent of GDP. 12) The policy of encouraging non debt creating flows such as foreign investment and discouraging debt creating flows such as external commercial 389

25 borrowings and NRI deposits should be continued in order to keep external debt within manageable levels. 13) In the post reform period, foreign investment is regarded as a source of capital, technology and managerial skills. However, adequate steps are still necessary to enhance foreign direct investment rather than portfolio investment. This is because it is the foreign direct investment which is expected to increase employment and output in the country. 14) The fiscal consolidation in the post reform period has been achieved by reducing public investment. However, public investment is still essential in sectors producing public goods and services. Hence, the policy of reduction in public investment should be reversed. 15) Finally, steps should be undertaken to eventually achieve full capital account convertibility on the basis of recommendations of the Tarapore Committee - II. ************** 390