CHAPTER - V INDIA'S BALANCE OF PAYMENTS OVER THE LAST FOUR DECADES

Transcription

1 CHAPTER - V INDIA'S BALANCE OF PAYMENTS OVER THE LAST FOUR DECADES

2 .To conduct a meaningful discussion regarding the role of export policy in India's economic development, it is essential to give a brief profile of India's balance' of payments over the last- four decades. The foreign exchange crisis seems to be getting grimmer and grimmer. The widening trade deficit in recent years brings home the stark fact that there is no alternative to stepping up our experts. Despite an increase of 29% in exports to Rs.20,281 crores during , the Balance of payments (BOP) position continued to be under severe strain, mainly due to an increase of 23.9% in imports and repayment to International Monetary Fund (IMF) and other obligations. During the First four years of the Seventh Plan, the average annual trade deficit has been of the order of Rs.7,600 crores. The pressures on our Balance of Payments continue unabated. Besides the IMF and other borrowings, there has been an increase in debt service ratio, slackness in indigenous oil production, deceleration in inward remittances and increased import requirements on account of bulk imports as also modernisation. Maintaining the high ratio:, of export growth, thus, is crucial. Balance of payment is a dynamic dependent variable reflecting the areas of.export performance and possibilities, import and import capabilities, foreign debt and foreign exchange position of a developing economy like that of India. It is imperative to explain the equilibrium and disequilibrium in balance of payment so as to

3 : 120 : focuss attention on the gap between market demand and market supply situations as such. The Balance of payments is the result of aggregate demand and aggregate supply. In the developing economies Balance of Payments position acts as a constraint on the continuing growth of their economies.'it is a limiting factor because it influences, the growth of the economy, the export potentialities, the saving and investment behaviour, import capabilities, foreign reserve position and the position of foreign debt. The accounts indentity of the Balance of Payments denotes that the Balance of Payments must. always balance. The process of balancing is that every entry has a counter entry similar to double entry book-keeping. So in totality, Balance of Payments must always balance. But it is quite possible for a country to have a persistent excess of debit in its current account, provided that its capital accounts has a net credit. The basic equality tends to simplify the analysis of dynamic changes in the balance of international payments. A Country's balance of internatinal payments is said to be favourable or in surplus when the total receipts from its exports, etc. to the rest of the world exceed the total payments for its imports etc; from the rest of the world. Conversely, its balance of international payment is said to be unfavourable or in deficit of its receipts fall short of its payments equal to its payments on account of its transactions with other countries.

4 121 A deficit in Balance of Payments may be inevitable due to unavoidable causes like change in consumer tastes and preferences, technological innovations, failure of exportable crop, political upheaval abroad resulting in loss of export markets, a sudden worsening of terms of trade, changes in economic situation either at home or abroad and deliberate policies adopted by Governments as and when a country imposes an import tariff, an export subsidy or a direct restriction by quota or embargo upon imports or exports, or as a result of Government trading or exchange control. A,number of factors affect the balance of payments, viz. (a) Increase -in.prices, (b) Emergency induced import increase, (c) Decline in Export (d) Swings in capital flows, (e) Increase in Investment and (f) Debt Service charges etc. A country's. net foreign balance on account of goods and services (Export-Import or X-M) reflects the difference between its aggregate income (Y) derived from its production of goods and services ; and its aggregate expenditure (E) the volume of goods and services which the country absorbs from all sources for its own uses. Hence a formula has been derived, X - M = Y - E. India has now traversed the path of planned development for more than four decades and it is now the proper time for a critical review of past experiences and provide an insight into the 'perspectives for the future, may be upto 2000 A.D BALANCE OF PAYMENTS AND INDIAN PLANNING : In the following sections of this chapter we shall discuss in detail the Balance of Payments position of India during different

5 : 122 : Five Year Plans. 5.2 Pre-Plan Period : When India became independent, it had a 'sterling balance' of Rs. 1,733 crores. This was the result of a sizeable surplus on balance of trade with the U.K. during the Second World War period when U.K. had made largescale purchases from India to meet its war requirements. The foreign exchange position of the country was, therefore, satisfactory. However, the immediate postindependence period was characterised by the release of 'pent-up demand' for imports (suppressed during the war) and shortages of food and raw materials (for example, jute growing areas and cotton producing areas had gone to Pakistan and India had to import both jute and cotton in large quantities to meet the domestic requirements). Thus, the import bill increased substantially while exports remained stagnant. The deficit had to be made good from the sterling balances. Devaluation of the rupee in 1949 and the outbreak of Korea War helped to increase the exports to some extent and consequently there _was a small surplus of Rs.39 crores in balance of trade in Taking the three-year period , and as a whole, the deficit on current account stood at Rs.260 crores. As far as capital account is concerned, there was a substantial outflow of Rs.324 crores in this period (mainly due to extraordinary payments such as pension, annuities and partition transfers to the U.K. and Pakistan, since the country had sufficient foreign exchange balances the payment obligations were met without borrowing. Taking both current and capital accounts together the foreign exchange reserves were drawn down by Rs.583 crores.* o

6 : 123 : 5.3. FIRST FIVE YEAR PLAN : In the First Five Year Plan, balance of payments difficulties were not considered insurmountable, since the development effort requiring direct foreign exchange expenditure was comparatively 2 small, amounting to SsAOO crores. Nevertheless, it was believed that indirect demand resulting from injection of purchasing power on account of investment, coupled with direct demand for investment goods and technology, would introduce pressures on the balance payments. Hence it was considered necessary to maintainmfftrict import and export controls throughout the Plan Period. g f I. ( Another aspect that the planners thought would adversely-'*affect the balance of payments was the deterioration in terms of trade. It was estimated that the balance of payments deficit would be around Rs crores per annum during the plan period as a result of investment, consumption and changes in the terms of trade. The first Plan period had one favourable element to start with, as far as the foreign exchange position was concerned. During this period, India had accumulated a sizeable sterling balance, amounting to approximately Rs.1800 crores. Therefore, the planners had anticipated that India would be able to draw t.50 crores per annum from the sterling balance to finance the deficit on the balance of payments. It was considered that the remaining deficit would have to be financed by external trade.^ Fortunately, the First Plan Period did not face any serious

7 : 124 : problems on account of the balance of payments. Contrary to the estimated deficit of Ss.200 crores per annum, the Five Year period as a whole witnessed a deficit of only b.50 crores (the larger deficit of Rs.142 crores in and a small deficit of Bs.9 crores in being partially offset by surplus in the remaining years). This favourable turn of events was attributed to the lower than 4 anticipated volume of food imports and machinery SECOND FIVE YEAR PLAN : Again this background, massive deficit on the balance of payments was built into the Second Plan, since the strategy of the Second Plan envisaged development of heavy industry. This necessitated increased imports of machinery, which could be financed only partially by India s exports, since they were expected to be stagnantthe sterling balance was also eroded. Over the five years, the aggregate deficit worked out to Rs.1120 crores. It was further estimated that in the middle of the plan period there would be a hump in the balance of payments deficit as a consequence of the cumulative impact of imports of steel, machinery and equipment. The Second Plan, unlike the First, anticipated terms of trade to remain, on average, as they had been in Further in the Second Plan it was expected that inflationary pressures would be 5 held firmly under control. Planners also anticipated that India would be able to earn Bs.51 crores per year on invisible accounts. Thus, the overall balance of payments deficit, which was estimated

8 : 125 : to be Rs.1120 crores, was expected to be financed by a net inflow of foreign resources, on either private or Government account. Unlike the First Plan, the Second Plan experienced a wide gap between the estimated deficit and the actual deficit. The Balance of Payments position during the Second Plan was under considerable pressure because the stress on industrialization involved a heavy stress on foreign exchange reserves of the country. So the foreign exchange reserves fell from Es.902 crores in to Us. 363 crores during The actual reduction of Us. 539 crores in the reserves was in contrast to the expectation that the reserves would fall by is.200 crores over the period. By the end of October, 1958, the decline was arrested through concerted measures like revision of the investment programme in the public sector and a severely restrictive import licensing policy. The Balance of payments position during the Second Plan is shown in Table The current account deficit, excluding official donations was estimated at Rs.1120 crores as against the actuals of t.1887 crores. During the Second plan net invisibles, other than official donations were expected to average Rs.51 crores per annum as against the actual average of Bs.78 crores in the First Plan. But it became Rs.84 crores on the average during the Second Plan. The average export earnings were expected to be Ss. 593 crores as against the average of Rs.622 crores and Rs.610 crores in the First and Second Plans respectively. Import payments, however, averaged Rs.1072 crores per

9 : 126 annum during Ss as against the Second Plan estimate of is. 868 crores over the First Plan actuals of Rs.724 crores, and were responsible for a sizeable increase in the current account deficit over the plan estimate. The trade deficit increased to is. 639 crores in from is. 464 crores in But with the help of the.severe restrictions on imports, the trade deficit was sharply reduced to Rs.454 crores in to fall further to is.300 crores in and again increased sharply to is. 450 crores in the last year of the Second Plan. The negative trade balance on the average amounted to RS.462 crores during the Second Plan and this was due to a sharp fall in exports and a sizeable increase in imports. The adverse balance of payments in the Second Plan is due partly to under estimation of the direct foreign exchange requirements of the plan and partly to failure to take into account sufficiently the growing import requirements of our developing economy THIRD FIVE YEAR PLAN AND ANNUAL PLANS With the experience acquired during the first two plans, the planners attempted, in the next plan, to draw up balance of payments taking into consideration a number of other variables: First> the estimated foreign exchange requirement for public and private investment in the Third Plan was t.203q crores. Second, maintenance imports became a factor to reckon with ; hence the foreign exchange requirement was Rs.3650 crores. Third, repayment for meeting debt obligations amounted to b.500 crores.

10 127 TABLE INDIA'S BALANCE OF PAYMENTS ON CURRENT ACCOUNT ESTIMATED AND ACTUALS (Rs. in Crores) SI. No. Items Ave.for 5 yrs. Esti- Actuals Esti- Actu- Esti- Actu* Esti- Actu- Esti- Actu- Esti- Actumated mated als. mated als. mated als. mated als. mated als. Estimated Total Actuals 1. Exports Imports Trade Balance (1-2) Indivisibles +62 (Excluding Official donations) ' Total Current Account Balance (3 + 4) Source : Compiled from the data provided in the plan document of Second and Third Plan.

11 : 128 : It was for the first time recognised that part of the defict had to be financed by increased export earnings. Therefore, it was estimated that total export earnings would be h.3700 crores. It was thought that the deficit would be corrected with the help of foreign assistance to the tune of is.2500 crores ; but this actually worked out to Is.3500 crores at the post devaluation exchange rates. The Balance of Payments on current account had been under considerable pressure since It re-emerged in and the decline in reserves (including net borrowings from the Fund) was is.48.6 crores in and Rs.64.7 crores in During the first two years of the Third Plan, India lost foreign exchange reserves of Ss.8.6 crores and there was also a net drawing of is.70.3 crores on the I.M.F. bringing the total outstanding drawals on that institution to is.931 crores. Similarly, there was a large decline in reserves in which was as much as t.88 crores. But foreign exchange receipts on account of invisible transactions on the current account increased by more than 20 per cent in The position of foreign exchange during the Annual Plans ( ) was terribly shaken with a considerable improvement in Mentton may:jbe;, marfe;.. here, that -. worsening; balahce -of payments by the end of the Second Plan and its re-emergence in the Third Plan forced the country to follow the policy of devaluation of Rupee in June, This had influenced the Government's trade policy as well a-s the structure of imports and exports

12 : 129 : greatly. Although the trade balance was negative during the Third and Annual Plans, slowly it subsided in The negative trade balance increased gradually from Rs.430 crores in to Rs.599 crores in the last year of the Third Plan. It showed an ever unhappy record growth of Rs.921 crores in In , the trade balance decreased slightly to Rs.809 crores and it substantially declined to Rs.551 crores in The export growth increased from 2.8 per cent in to 15.8 per cent in third year of the Third Plan. The last two years of the plan experienced a decline and negative growth of 0.7 per cent in The post devaluation effect increased the total exports from Rs.810 crores in to Rs.1157 crores in showing a growth of 42.8 per cent over and a record increase to Rs.1358 crores in The balance of payments position was under considerable pressure since Hence steps were being taken to improve the position in the succeeding five year plans. The import growth varied from a negative value of 2.9 per cent in to a record growth of 10.3 per cent in and it became substantially lower to 4.4 per cent in The total imports recorded a peak level of Rs.2078 crores in , showing an increase of 47.5 per cent over the last year. Imports were substantially declined in and due to stringent

13 : 130 : restrictions on imports and devaluation of rupee in June The Exports, Imports and Trade Balance details are shown in Table TABLE EXPORT-IMPORTS AND TRADE BALANCE ( AND ) RUPEES CRORES Year Exports Growth Rate in Percentage Imports Growth Rate in Percentage Trade Balance Q * Source : Government of India, Economic Survey, FOURTH FIVE YEAR PLAN.* The balance of payments was fairly stable durng the first three years of the Fourth Plan. During this period, the country added Rs.272 crores to its foreign exchange reserves raising it to Es crores apart from clearing the entire outstanding borrowing of ts.279 crores from the IMF. There, was an improvement in the reserve position of Es.551 crores. It was possible to the. extent of Rs.244.6

14 131 : crores by the allocation of Special Drawing Eights by the IMF and Es.24.4 crores by the appreciation in the value of reserves as a result of changes in the par value of reserve currencies. A balance of Es.282 crores reflected the actual balance of payments surplus exclusive of the repayments to the IMF. There was an improvement in the overall balance of payments of Us.3 crores. Exports rose from Is crores in to Es crores in , Rs crores in , Rs crores in , 1971 crores in and Es.2523 crores in resulting a total value of Es.9,050.7 crores during the Fourth Plan. The exports were expected to exceed the plan projection by over t.200 crores.but the actual in the five years showed an increase of Es.532 crores over the plan estimate. The average annual rate of growth of exports was worked out at 7 percent. But actual increase was 4.1 percent in , 8.6 percent in , 4.8 percent in , 22.6 percent in and 28 percent in The imports declined in by 17.1 percent to Bs.1582 crores from Rs.1909 crores in It rose modestly from 3.3 percent in to 11.7 percent in However, the growth of imports fell to 2.3 percent. But in the last year of the Fourth Five Year Plan, imports recorded a substantial increase of 58.3 percent, i.e. total imports rose from Es.1867 crores in to Es.2955 crores in The negative trade balance decreased from Es. 169 crores in to fc.99 crores in but again increased to Es.217 crores in In , however, there was a positive trade balance and again a negative trade balance of Es.432

15 : 132 : crores in the last year of the Fourth Plan. The balance of payments during the Fourth Plan was, thus, reasonably stable with little fluctuations. Exports-Imports and Trade balance during the plan is shown in Table TABLE ~ 5.3 EXPORTS - IMPORTS AND TRADE BALANCE ( ) RUPEES CRORES Year Exports Incl. of Reexports Growth Rate in Percentage. Imports Growth Rate in Percentage. Trade Balance Source : Government of India, Economic Survey BALANCE OF PAYMENTS ( ) : The sharp world price hike in (the base year for the Fifth Plan) in case of our major imports like food grains, POL, steel, non-ferrous metals, fertilizers and news print induced the planners to have a proper planning of the balance of payments to achieve accelerated growth and greater self-reliance. The balance of payments policy incorporated both continuing and new factors which have got some bearing on the problem of growth. The main assumptions underlying the balance of payment projections were : (i) adoption of appropriate and effective measures to bring about

16 133 sufficient improvement in the balance of payments by the end of the plan ; (ii) imposition of restraint on imports that directly or indirectly contribute to inessential or elitist consumption ; (Hi) increase in output to meet the requirements for domestic consumption and exports ; and (iv) tightening up of foreign exchange control to reduce net freight outgo on overseas trade. The balance of payments projections on the above assumptions are presented in the Table 5.4. TABLE BALANCE OF PAYMENTS PROJECTIONS FOR THE FIFTH PLAN RUPEES CRORES Item Amount CURRENT ACCOUNT : 1. Trade (i) Exports.. 12,580 (ii) Imports.. (-) 14, Services (net) Current Transfers (net) Investment Income (net) (i) Debt service (-) 911 (ii) Other than debt service (-) Total.. (-) 2,231 Contd..

17 : 134 CAPITAL ACCOUNT : 1. Private Capital (net) (-) Banking Capital (net) - 3. Official Capital(net) Debt Service (-) 1, Assistance to foreign Countries (net),. (-) Lags between export Shipments and receipts,. (-) Commercial credits (gross) 8. External assistance (gross) 400 4, Total 2,231 Source : Govt, of India, Draft , Page-74. Fifth Five Year Plan, The revised estimate was about double the draft projections made at the time of inception. The exports and imports showed an average annual growth of 21 percent and 19.5 percent respectively during the first four years But during the five years the I growth of exports recorded 18.3 percent, and imports 19.5 percent. The negative balance of trade showed an increasing trend from Rs.1190 crores in to Rs.1229 crores in and a positive balance of Rs.68 crores in The trade balance showed a minimum negative trend in to Us.612 crores and again increased sharply to t.1085 crores in the last year of the plan. The total negative trade balance of Us.4116 crores as against the draft estimate of M.1520 crores. Of course, the actual imports stood at

18 135 : less by t.835 crores than the revised plan estimate due to some achievements in the economy of imports. The export-imports and trade balance is shown in Table 5.5. TABLE EXPORTS-IMPORTS AND TRADE BALANCE ( ) RUPEES CRORES Year Exports Percentage Imports Percentage Trade Balance Source : Government of India, Economic Survey y The oil-shock had some important favourable repercussions on the Indian foreign exchange position : (1) First and foremost was the rapid increase in private remittances from oil exporting countries. A large number of Indian workers temporarily migrated to the oil-rich Middle East countries to work there as unskilled workers, skilled technicians, office assistants, nurses etc. They kept sending their net earnings to their families in India. As a result, transfer payments to India on private account aggregated is. 3,128.7 crores over the fifth plan period since the total receipts on invisible account were Ss.8,877.9 crores, the share

19 : 136 : of transfer payments on private account in total receipts from 7 invisibles stood at 35.2 percent. (2) There was a strong growth in exports of nearly 31 percent in over and of 23 percent in over (in rupees terms). The international environment was also conducive as world trade rose by over 8 percent a year in value terms during this period. In volume terms, world trade declined by 4 percent in 1975 but rebounded next year with a rise.of 11 percent. India s export effort was also aided by the fact that after the sharp increase in prices during and , price increases were modest in the following years (the average rate of increase in wholesale prices between to was only 1.5 percent per annum). This made Indian exports competitive in the international markets. (3) As a result of the conservation measures adopted domestically and increase in oil production, the country was able to arrest the growth in oil imports; (4) Aid receipts were reasonably buoyant and India drew on various International Monetary Fund facilities during the years to Over the next three years, by the time of the Second Oil shock, India had already repurchased the fund drawings. As a result of these factors, the Indian Economy adjusted to the first oil shock rather quickly. Taking the current account and

20 : 137 : and capital account and errors and omissions together, the total deficit in balance of payments aggregated Ss.3, crores. This was financed by foreign assistance (both loans and grants), drawings from the IMF and draw down of reserves. The foreign exchange reserves of the country which were Ss crores in (the year. preceding the Fifth Plan) rose to t.5,820.7 crores in (the last year of the Fifth Plan). Thus the foreign exchange position of the country was satisfactory. While in , reserves could finance only 4.4 months imports, in they could 8 finance 9.4 months' imports BALANCE OF PAYMENTS POSITION : India's balance of payments showed a deteriorating trend during the first year of the Sixth Plan due to a substantial rise in oil imports corresponding to the second oil shock and a declining trend of trade. The current account deficit rose about six times from Rs. 235 crores in to Rs.1657 crores in and further to Rs.2317 crores in It declined marginally during and but increased by 26 percent in the last year of the plan to is.2852 crores. India borrowed from the IMF in Rs.274 crores under the Compensatory Financing Facility (CFF) and t.545 crores from the IMF's Trust Fund to meet the balance of payments deficit. Later on in November, 1981, India borrowed an amount of SDR 3.9 billion during the plan under Extended Fund Facility (EFF) arrangement with IMF. But this was insufficient to meet the deficit and consequently foreign exchange reserves had to be utilised for the purpose, as a

21 : 138 result of which the foreign exchange reserves declined. But in , the current account deficit was lower than the net capital inflow and hence the foreign exchange reserves rose by Us. 926 crores. The overall external payments position was somehow satisfying during the last year of the Plan. TABLE INDIA'S BALANCE OF PAYMENTS (RUPEES CRORES) Year Imports Exports Trade Balance Net Current Account Net Capital Account , , f , , (31.0) (6.0) , , (10.7) (18.1) , , (7.4) (17.4) , , (7.6) (11.3) , , (16.5) (7.6) Note : Figures in the brackets show percentage change over the preceding year. Source : RBI Bulletin - June' 1987, Page.499.

22 : 139 The current account deficit reached the peak of 1.6 percent of the GDP in and marginally declined to 1.2 percent in the following two years and remained around that level in the next year. The ratio of trade deficit to GDP came down from 4.7 percent in to a little over 3 percent in This was due to a decline in the ratio of imports to GDP from 9.8 percent to 8.8 percent and an increase in the ratio of exports to GDP from 5.1 percent to 5.6 percent. Net invisible receipts remained subdued and its proportion to GDP declined significantly from 3.4 percent to 1.8 percent during the Sixth Plan period (Table 5.7). TABLE -5.7 CURRENT ACCOUNT TRANSACTIONS AS PERCENTAGE OF GDP. SI. No. Item Imports Exports Trade Deficit (1-2) Invisible Receipts* (3.7) (4.2) (3.6) (3.4) (3.4) (3.7) 5. Invisible Payments Invisible (Net) (4-5) Current Account (0.7) (1.7) (1.9) (1.7) (1.4) (1.6) Deficit

23 : 140 : * Inclusive of official grant assistance. Totals may not add up owing to rounding. Note-1 Figures in brackets represent percentages excluding official grants, PL 480 Title II grants and US-Embassy expenditure in India out of PL 480 rupee funds. Source : RBI Bulletin, June 1987, Page The Sixth Plan incorporated projections of some items of balance of payments at prices. Total exports and imports in the Sixth Plan were projected at t.41,078 crores and b.58,851 crores respectively resulting in a trade deficit of b.17,773 crores. But the actual trade deficit stood at b.21,899 crores, i.e. an increase of b, 10,126 crores in absolute terms. The current account deficit was projected at b.9,063 crores while taking into account the net receipts from invisibles at b.8,710 crores. There was a shortfall in exports of b.6,235 crores. The annual growth rate of exports was 3.2 percent as against the plan projection of 9 percent. Similarly imports exceeded the plan projections by b.3891 crores. The annual growth of actual imports of 6.6 percent was lower than that of 9.5 percent as projected by the plan. The plan projection and actual balance of payments position is shown in Table 5.8 below.

24 141 TABLE BALANCE OF PAYMENTS DURING SIXTH PLAN RS. CRORES AT PRICES SI. No. Item Plan Projections Variations in relation Projections to Plan Actuals Absolute Amount Percentage 1. Exports 41,078 34,843-6, Imports 58,851-62, , Trade Deficits 17,773-27,899-10, Non-monetary Gold Invisibles 8,710-13, , Current 9,063-14,163-5, Account Deficit 7. Loss on 2, terms oftrade 8. Current 11,976 Account deficit,loss on terms of trade and errors and omissions(which equals financing requirement). -14,683 r - 2, Source : RBI Bulletin, June 1987, Page-510.

25 142 : Thus, the Sixth Plan was launched in an environment of a difficult international and domestic economy, with a rather large deficit. The last four plans were accompanied by a large amount of foreign assistance, and a small growth in exports. Adjustments in the domestic investment pattern also contributed considerably to the reduction of the balance of payments deficit through import substitution. The period to witnessed a remarkable shift in India's balance of payments and some change in its character. While the deficit on the merchandise account had been almost similar to what it had been in the last decade with a small surplus in the trade balance in , the deficit on the current account had been smaller. This change was attributable to two major factors : first, a rapid rise in private transfer payments ; Second the fact that India began enjoying a surplus on the service account as well. In the subsequent years, especially during the period to , the balance of payments deteriorated again. There had been a huge deficit on the merchandise account. But since no data for the period after have yet been released by the Reserve Bank of India., one must rely on the Government statement that the merchandise deficit had been so large that other earnings were no longer able to compensate as they had previously. Four major factors contributed to this huge deficit. First, successive increases in the price of petroleum, as well as other imported products ; Second, decline in domestic production of various products, such as edible oils, fertilizers etc. leading to

26 : 143 : increased imports ; Third, increased imports of petroleum as a result of the agitation in Assam, the major petroleum producing State of India; and finally, the import liberalisation which has taken place over the last few years. 5.9 BALANCE OF PAYMENTS POSITION DURING THE SEVENTH PLAN : Inspite.of a substantial growth in exports, the balance of payments by the last year of the plan remained under pressure due to a rise in the import bill and huge repayments to the IMF under the Extended Fund Facility (EFF). It was partly due to an increase in POL imports, purchase of civilian air crafts and the international price hike of certain commodities. The current account deficit in rupee terms was marginally lower than t.10,429 crores in The current account deficit as percent of GDP (at current market prices) declined from 2.3 percent in to 1.9 percent in It rose sharply to 2.7 percent in and had come down to 2.3 percent in Thus, the average current account deficit during the seventh plan was around 2.2 percent as against the plan estimate of 1.6 percent and much higher than the average of 1.3 percent in Sixth Plan. Table 5.9 summarises trends in the key variables (as proportion of GDP) during the Seventh Plan period. TABLE KEY INDICATORS OF INDIA' S BALANCE OF PAYMENTS AS PER CENT OF GDP Year Exports Imports Net Invisibles Trade Balance Current A/c Balance

27 : 144 : Year Exports Imports Net Invisibles Trade Balance Current A/c Balance Average SOURCE : Government of India, Economic Survey , Page-152. In absolute terms, the current account deficit averaged around is. 7,772 crores (US $ 5,539 million) per annum during the Seventh Plan compared with an annual, average of is.2,227 crores (US $ 2,334 g million) for the Sixth Plan. So the balance of payments situation has remained under strain throughout the seventh plan due to wide trade deficits and fall in the surpluses on invisible account and huge repurchases from the IMF under EFF which was as high as SDR, 2,752 million during the Seventh Plan period. During the last year of the Seventh Plan, India's foreign exchange reserves (including foreign currency assets of the Reserve Bank of India, gold and SDR holdings decreased by is.788 crores to is. 6,251 crores as against a decline of b.647 crores in By the end of March 1990, these reserves stood at SDR 3,045 million in SDR terms which showed a fall of SDR 670 million during and a decline of SDR 771 million in Thus foreign exchange reserves declined miserably by SDR 2,959 million and the balance of payments during the Seventh Plan much deteriorated in comparison to the Sixth Plan and what more the Gulf crisis of 1991 further strained the balance of payments in the

28 : 145 first year of the Eighth Plan. The imports-exports and trade balance is shown in Table TABLE ~ 5.10 EXPORTS, IMPORTS AND TRADE BALANCE RUPEES CRORES Year Exports Percentage growth rate. Imports % Growth rate Trade Balance , , , , , , , , , , , , , , , , , ' -10,644 (P) (P) = Provisional Source : Government of India, Economic Survey, The unprecedented pressure on balance of payments during the first four years of the Seventh Plan is clearly brought out in table As far as the methods of financing the deficits are concerned, India had to depend considerably on external assistance. However, it is important to point out that the environment for concessional aid for India has progressively become more and more unfavourable over the years, basically due to competition from various developing countries in Asia and Africa for obtaining multi-

29 : 146 : lateral and bilateral aid, and due to the non-cordial political relations with the chief donor U.5.A. Accordingly, during eighties India had to seek more and more external commercial borrowings. Total external commercial borrowings have risen from b. 1,252 crores as at the end of March 1980 to b.24,500 crores as at the end of March 1990.^ Another cause for concern in the eighties was the flattening out of the flow of workers' remittances from the Middleeast countries. A part of the reason for the decline was the Iran- Irag war. But a more important reason was the reduced level of economic activity in the oil-rich Gulf countries. The above analysis shows that the balance of payments situation in the eighties turned grim. With increasing trade deficits, flattening out of private remittances and a fall in concessional aid to finance the ever increasing deficits, India has had to depend increasingly on 'high cost' methods of financing the deficit, viz., recourse to the Extended Fund Facility of the IMF, external commercial borrowing and NRI deposits. These methods of financing the deficit will further increase the debt burden on the economy worsening the situation in the years to come SUMMARY : Economic development in India illustrates the effect of economic development on balance of payments position. The Balance of payments position has been greatly influenced by the export policy and performance during the plan period. On ther other hand. Balance of payments is a dynamic dependent variable reflecting the areas of export performance and possibilities, import and import capabilities

30 : 147 : foreign debt and foreign exchange position of India. A large number of factors like increase in exports, swings in capital flows, increase in investment and debt service charges affect the balance of payments. Unable to produce herself'all the machinery, equipment and materials, India had to look for foreign supplies. In the process of financing these imports, the country was faced with large deficits in.balance of Payments. During the Pre-Plan period the Balance of Payments position of India was satisfactory since it could manage to achieve a sizeable, surplus on Balance of trade when U.K. had made large scale purchases from India to meet its war requirements. The Balance of Payments difficulties were not intolerable in the First Plan as the foreign exchange expenditure for development was comparatively small. But the deteriorating terms of trade adversely affected the Balance of Payments to some extent. It was during the Second Plan that several disequilibra ting forces started operating and caused a large deficit. The requirements of machinery and intermediate products increased markedly due to the strategy of heavy industrialization which could be financed partly by India's exports. In the Third Plan, the balance of payments situation continued to cause deep concern. The earnings in invisibles continued falling due to rising payment of interest. This widened the gap on current account. With continued empasis on machine-building and heavy industries, the requirements of development imports continued to increase: Import substitution achieved by them did not produce any significant effect. The worsening Balance of Payments forced the

31 : 148 : country to follow the policy of devaluation in June During the first three years of the Fourth Plan the Balance of Payments was fairly stable. The foreign exchange reserve position was also improved considerably. However, there was a marked improvement in and , thanks to a significant reduction in imports and a substantial increase in export earnings. Thus the data on * exports and exports during the Fourth Plan reveal that the Balance of Payments position especially the negative trade balance was tolerable in comparison with the previous plans. During the first two years of the Fifth Plan, the negative Balance of trade showed an increasing trend. A positive trend in the third year and an increasing trend in the negative trade balance were marked during the last two years of the plan. The export growth showed a declining trend in the Fifth Plan. However, the foreign exchange position improved substantially due to rapid increase in private remittances from oil exporting countries. The Sixth Plan experienced a highly difficult Balance of Payments position since it was launched in a difficult international and domestic environment. In the first year of the Sixth Plan, India s Balance of Payments showed a declining trend due to a substantial rise in oil imports corresponding to the second oil shock and unfavourable terms of trade. During the Seventh Plan period, the Balance of Payments remained under pressure due to an increase in the import bill and huge repayments to the IMF. The average current account deficit as percentage of GDP during the Seventh Plan was much higher than the average during the Sixth Plan. In absolute sense the average current

32 : 149 : account deficit during the Seventh Plan became three and half times more than that of the Sixth Plan. This was due to the fall in the surpluses on invisible account and huge repurchases from the IMF under EFF. *****

33 : 150 : NOTES AND REFERENCES 1. Y.V.K. Sarma (1989) : India's Balance of Payments to , A Survey", Journal of the Indian School of Political Economy, Vol.No.2, July-December, P Government of India (1951) : Planning Commission The First Five Year Plan, New Delhi, P ~Ibid, P Government of India (1956) : Planning Commission, The Second Five Year Plan, New Delhi, P Ibid, P Ibid, P Government of India ( ) : Economic Survey, Ministry of Finance, New Delhi, Table 6.4, P.99 and Government of India ( ) : Economic Survey, Ministry of Finance, New Delhi, Table 6.3, P Y.U.K. Sarma, Op.cit, statement 2,P Government of India ( ) :... Economic Survey Ministry of Finance, New Delhi, P Reserve Bank of India ( ) : Report on Currency and Finance, Bombay, Vol.1, P.387.