C H A P T E R - III STRUCTURE O F IN DIA'S BALANCE OF PAYMENT

C H A P T E R - III STRUCTURE O F IN DIA'S BALANCE OF PAYMENT 47

The previous chapter dealt with conceptual framework of Balance of Payment. The concepts like definition of Balance of Payment, double entry system of recording data, principles of valuation and timing, surplus/deficit and methods of correcting disequilibrium were broadly studies therein. The chapter was aimed to study the conceptual framework of Balance of Payment, in general. The purpose of present chapter is to study framework of Balance of Payment with particular reference to India. The chapter covers aspects right from collection of data and its presentation/classification in a typical format. The trends in BOP since first oil shock i.e. year 1973-74 are only highlighted. The specific reference to Foreign Currency Non-Resident Account is made where necessary. The whole chapter is divided into following sections 3.1 Sources of Data on India's Balance of Payment 3.2 Presentation/Classification of Data 3.3 Itemwise Study 3.4 Scenario of India's Balance of Payment 3.5 Sources to Finance Deficit 48

Sources of Data on India's Balance of Payment :- The data on India's BOP are obtained as a bye-product of exchange control administration and the management of foreign exchange resources. Besides, few surveys are conducted specifically for BOP purposes. The sources of data are as given below a] Reserve Bank of India b] Government of India c] Survey of unclassified receipts d ] Other sources a] Reserve Bank of India Within the Reserve Bank of India, data are obtained from three departments - (i) Exchange Control Departmait, (11) Department of External Investments and Operations (D E IO ), (ill) Deposit Accounts Department (D A D). (1) Exchange Control Department (ECD) A major part of the data on various components of BOP statistics is obtained from B C D 's records. Individuals, organisations and Authorised Dealers (ADs) submit various returns and statemoits which are received in various regional offices of ECD for variflcation e.g. ADs are required to report twice in a month all their transactions relating to foreign exchange in prescribed format known as "R- retum". 49

Apart from varification of these returns, ECDs concerned with ensuring compliance with exchange control regulations and also with coding of transactions reported by ADs. A substantial portion of compilation of BOPs in respect of (i) Exports, (ii) Imports, (iii) Private Services and Transfers, (iv) Servicing of Commercial Loans, (v) Private Capital Receipts and Payments, (vi) Banking Capital Movemaits, are based on exchange control data. Some of the examples of return/statement submitted are (a) R-retum, (b) A-forms, (c) BAL Statements, (d) FCL Returns. (a) R-return The transactions in foreign currencies are required to be reported twice a month in R1 (Stg.Pound), R2(U S$), R 3(D M ), R 4(Jap.Yen), R5{Rupee accounts of non-resident and ACU ), R6(others), returns depending upon the currency involved. (b) A-forms A resident in India who effects remittance in foreign currencies is required to fill in Al(Imports) or A2(other than imports) form as appropriate. In respect of operations on non-resident accounts which call for their reports to or prior approval from RBI, form A4 is required to be completed. 50

(c) BAL statements ADs are required to submit BAL statements which gives details of their foreign currency balance with their branches and correspondents abroad and rupee balances of non-resident banks with them. (d) FCL returns These are filled by borrowers and provide complete information as regards foreign currency loans. STAT 3,4,5 and 6 are the statements submitted by ADs to RBI with the help of which data in respect of Non-Resident accounts is collected. STAT 3 :- It relates to transactions in respect of "Non-Resident Ordinary Accounts". ADs are required to submit the statements to RBI on quarterly basis in duplicate alongwith A4 forms. STAT 4 :- It is a monthly statement which ADs are required to submit to RBI (one copy) in respect of operations of "Non- Resident External Accounts" alongwith A4 forms. STAT 5 5 6 As per exchange control manual clause 33 B6 (i) 8 (ii), offices/branches of ADs accepting FCNR deposits are required 51

to send to their link offices (i.e. offices which undertake sale/purchase transactions with RBI) a monthly statement of FCNR deposits by 10th of the month following the month to which it relates in STAT 5 form. The link offices are required to send these statements to RBI by 15th of the month following the month to which it relates. (Refer Annexure-I) Similarly ADs are also required to send to RBI a monthly summary statement in form STAT 6 in duplicate in respect of FCNR operations so as to reach RBI by 10th of the following month to which it relates. The forms A4 approved by RBI or completed for report to RBI governing operations during the month are submitted with the statement. (Refer Annex-1) (ii] Department of External Investments 6 Operations (DEIO) The DEIO looks after the management of foreign currency assets held by RBI, external debt servicing in respect of Government, Foreign exchange receipts on behalf of Govt, administration. Under RBI's foreign currency accounts scheme (i.e. FCNR), 'Authorised Dealers' are required to surrender to RBI foreign currencies (Sterling Pound, US $, DM, Jap.Yai) representing fresh deposits made under this scheme. The sales and purchases of foreign currency by ADs under this scheme are maintained in DEIO. The sales to ADs arise at the time of repatriation of the balances in the FCNR accounts. Thus DEIO is source of data relating to FCNR accounts. 52

(iii) Deposit Accounts Department (DA D) The rupee accounts of the non-resident central banks and Institutions like IMF, IBRD, IDA, ADB, etc. are maintained in DAD of RBI. The details of transactions recorded in these accounts are obtained from this department. b] Government of India Government of India including its agencies abroad is another source of collecting relevant data from department of economic affairs, ministry of finance and govt, of India's agencies located abroad. c] Survey of Unclassified Receipts A few surveys are conducted specifically for BOP purposes. One of them is "Survey of Unclassified Receipts". Under exchange control regulations, ADs are not required to report purpose of their purchases of foreign exchange from the public provided these are individually in amounts equivalent of less than Rs.l0,00(Vr The aggregate of such receipts are reported by banks in the prescribed R-returns. Thus such receipts remain unclassified. With a view to classify these receipts appropriately in the BOP a survey called "Survey of Unclassified Receipts" is conducted. d] Other sources The other sources comprise data received from long term financial institutions like ICICI, IDBI, IFCI and US Embassy in India. 53

3.2 Presentation/Classification of Data The data on India's Balance of Payments are published regularly in the Reserve Bank of India's monthly bulletin and presented as per format given below (Rs.Crores) Items Credits Debits Net A] CURRENT ACCOUNT I. Merchandise i) ii) Private Government II. III. Non-monetary gold movement Invisibles 1. Travel 2. Transportation 3. Insurance 4. Investment Income 5. Government, not included elsewhere 6. Miscellaneous 7. Transfer payments i) Official ii) Private Total Current Account (I + II + III) B' CAPITAL ACCOUNT 1. Private i) Long-term ii) Short-term 2. Banking 3. Official i) Loans ii) Amortisation iii) Miscellaneous Total Capital Account (1 + 2 + 3) 54

C] I.M.F. D] SDR ALLOCATION E] CAPITAL ACCOUNT, IMF AND SDR ALLOCATION (B + C + D) F] TOTAL CURRENT ACCOUNT, CAPITAL ACCOUNT, IMF AND SDR ALLOCATION (A + E) G] ERRORS AND OMISSIONS H] RESERVES AND MONETARY GOLD The Balance of Payment statemait is presented in the conventional two column credit/debit accounting format. Also^ Balance of Payment items are divided into two broad sections namely, Current account and Capital account. The Current account transactions are classified into (I) Merchandise, (II) Non-monetary Gold Movement, (III) Invisibles. Invisible transactions are further classified into groups of service transactions like travel, transportation, insurance etc., and investment income and transfer (grants, gifts etc.). In the Current account, entries for "Exports-FOB" and "Imports-CIF"are recorded as credits and debits respectively. For all invisible transactions other than transportation and insurance, credits and debits are recorded on gross basis. The Capital account records those transactions which represent changes in foreign financial assets and liabilities. The Capital account distinguishes three sections namely, (I) Private, (II) Banking, (III) Official. The Private sector statistics broadly refer to the

capital account transactions of resident individuals and corporate entities in the private sector. The banking sector statistics broadly refer to transactions in foreign financial assets and liabilities of the banking institutions. The official sector includes Reserve Bank transactions and capital account transactions of Central, State and Public Sector undertakings. In the Balance of Payment sumrnary statement, purchase and repurchases from IMF and allocation (cancellation) of SDRs are segregated from the capital account and shown as separate items. The provisional estimates of BOPs e.g. of year 1988-89 worked out alongwith actuals for 1987-88 are given below TABLE-CI) : India's Balance of Payments (Rs. in Crores) 1988-89 Provisional Estimate 1987-88 Actuals A) Current Account 1. Imports Cif 34513.0 25692.5 2. Exports Fob 20510.5 16396.4 3. Trade Balance -14002.5-9296.1 4. Official Transfer (net).. 665.8 532.4 5. Other Invisibles (net).. 2907.6 2471.1 6. Current Account (net).. -10429.1-6292.6 56

B) Capital Account 1. External assistance Disbursements Repaymaits 2. Commercial Borrowings ** Disbursements Repayments 3. Non-Resident Deposits (net) 4. Other capital (net) 5. Total Capital Account (net) C) I.M.F. (net) D) S.D.R. Allocation E) Capital Account, IMF and SDR allocation F) Total Current Account Capital Account, IMF and SDR allocation G) Errors and Omissions H) Reserves and Monetary Gold 3186.2 4859.6-1673.4 3197.9 4293.1-1095.2 2475.2 2261.4 11120.7-1547.3 9573.40-855.7-593.6 + 1449.3 2944.8 4453.9-1509.1 1266.00 1945.7-697.7 1840.1 1442.2 7493.1-1209.0 6284.1 8.5-947.7 + 956.2 (Excluding Refinance Credits) From above data, it is observed that the trade deficit went up sharply by Rs.4706/- i.e. to Rs. 14003/- Crs. during 1988-89. The widening of Trade deficit was the result of substantial increase in imports i.e. to R s. 34513/- Crs. which more than offset rise in exports. Official transfers amounted to Rs.666/- Crs. as against Rs.532/- Crores in 1987-88. Net invisible receipts amounted to Rs.2908/- Crs. in 1988-89, which shows an increase of Rs.437/- Crs. over that of previous year. This was due to compensation of Rs.644/- Crs. on 57

account of Bhopal gas victims. The total current account deficit went up from Rs.6293/- Crs. in 1987-88 to 10,429/- Crs. in 1988-89. The net inflow of capital amounts to 11,121/- Crs. in 1988-89 which was higher by 3628/- Crs. in the previous year. The loans under external assistance at Rs.3186/- Crs. were higher in 1988-89 by Rs.241/- Crs. than in the previous year. Commercial borrowings were higher at 3198/- Crs. in 1988-89 than those of Rs.l266/- Crs. in 1987-88. The net inflow of funds under FCNR accounts and Non-Resident rupee accounts schemes taken together at Rs.2475/- C r s., which is higher by Rs.635/- Crs. than in 1987-88. The aggregate capital inflows amounted to Rs.9573/- Crs. and financed 87% of the current account deficit including errors and omissions and the balance was financed through drawing down on reserves. 3.3 Itemwise Study :- below The description of every item of Balance of Payment is as given (A) Current Account :- i) Merchandise Trade In principle, items included under merchandise trade should cover all transactions relating to movable goods where ownership of goods changes from Residents to Non-Residents (Exports) and from Non-Residents to Residents (Imports) and 58

recording of items be done on FOB basis which confirms with the recommendations of IMF manual. In India while exports valuation confirms to above recommendations but imports are valued and recorded at GIF basis. The entries are recorded for exports on FOB basis and imports on GIF basis as credits and debits respectively. ii) Non-Monetary Gold Movements The ' monetisation' refers to transfer of gold from Nonmonetary stocks to monetary stock and 'demonitisation' refers to transfer from monetary stock to non-monetary stocks. The counterpart entries to the increase (debit) in official reserve assets as a result of monetisation of gold are recorded as 'Gredit' in the category of 'Non-monetary Gold Movement'. iii) Invisibles Traditionally a distinction is maintained within the current account of Balance of Paymets between merchandise or visible trade account and an invisible account. This tradition is followed in Indian Balance of Paymait too, by way of grouping of following items under the heading 'Invisibles'- (a) Travel (b) Transportation (c) Insurance (d) Investment income (e) Govt, not included elsewhere I (f) Miscellaneous (g) Transfer payments. 59

(a) Travel credits cover travel receipts in foreign exchange in amounts equivalent of IRs.10,000/- and above. These are remittances received from organisers of foreign tourists parties located aborad for meeting their hotel expenses in India. Also included are funds received from abroad, for meeting the expenses of foreign students enrolled in Indian educational institutions. In addition^ credits include 'Unclassified receipts', (i.e. purchases of F.E x. by ADs in amounts individually equivalent of Rs.10,000/- and allocated to travel). In contrast travel debits cover those items in which foreign exchange is sold to residents for travel abroad for the purpose of - (1) Business (2) Expenses of Indians studying abroad (3) Pilgrimage (4) Medical treatment, etc. (b) Transportation account data are derived from transpotation transactions reported in the exchange control records. Transportation credits include i) The estimated freight on exports invoiced on CIF/CF basis. To the extent exports are carried by Indian Steamship companies their freight earnings represent the countrys earnings from transportation. ii) Remittances received by Indian Steamship/Airline companies from their offices/agents abroad. 60

iii) Remittances received by Indian branches/agents of foreign steamship/airline companies. Transportation debits include i) Remittances made by Indian steamship/airline companies to their offices/agents abroad. ii) Remittances made by Indian branches/agents of foreign steamship/airline companies to their principds abroad. iii) Freight separately paid to non-resident steamship/ airline companies directly i.e. when imports are invoiced on FOB basis. (c) Insurance credits comprise premiums on all kinds of insurance cover provided by Indian insurers and claimed disbursement from non-resident insurers received through ADs. Insurance debits comprise premiums on all kinds of insurance remitted to foreign insurance companies and claims paid to non-residents. (d) Investment income credits cover earnings received by Indian residents from the ownership of foreign financial assets and debits cover income paid to non-residents accruing from their ownership of financial assets in India. Investment Income receipts include interest 61

received on holdings of SDRs with IMF and remuneration received on India's reserve position in the fund. Investment Income payments include interest paid on loans/credits received from foreign govts, and international institutions and IMF. Interest payments on deposits held in non-resident external rupee accounts and foreign currency non-resident accounts are not recorded under 'Investment Income Account'. When funds under these accounts are repatriated abroad they are recorded under the capital account and these cover both the principal and interest. This particular treatment is accorded to these transactions because of non-availability of breakdown of repatriated funds under principal and interest. (e) Government credit entries mainly comprise funds received from foreign governments for maintenance of their Embassies in India. The debits mainly comprise remittances made by Government of India for maintenance of Indian Embassies and diplomatic missions abroad. (f) Miscellaneous covers receipts and payments to technicians and to others for professional services and receipts and payments for royalties and management fees. 62

(g) Official transfer credits represent offsetting entries for donations and technical assistance in cash received by Govt.of India from non-residents, and grants in cash as well as by way of imports, under the external assistance from foreign Governments. 'Official transfer' debits represent offsetting entries for remittances in cash by way of gifts granted to nonresidents by the official sector in India and grants by way of supply of commodities and technical assistance provided by Govt.of India to non-residents. The private transfer credits include cash remittances for family maintenance from Indian nationals abroad and repatriations of savings by Indian nationals abroad regardless of purpose and gifts and donations to religious institutions in India received from abroad and immigrants funds. The private transfer debit comprise offsetting entries made by residents to non-residents e.g. remittances made by foreign nationals in India for family maintenance and immigrants funds etc. (B) Capital Account This account contains all transactions of financial nature. It covers transactions relating to India's foreign financial assets 63

and liabilities and they are classified according to the institutional sector of the Indian creditor and debtor. The three sectors distinguished are (I) Private sector (II) Banking sector (III) Official sector. The transactions attributed to each sector are those that represent changes in its assets and liabilities. (I) Private Capital This item includes capital transactions of resident individuals, firms, privately owned non-financial corporate enterprises and non-bank financial enterprises with non-residents, which may be non-resident individuals, corporate entities or official bodies and international institutions. Private capital is subdivided into (a) Long term and (b) Short term. " The Non-Resident External Rupee Accounts and Foreign Currency Non-Resident Accounts to which this research is aimed at fall under this category of Private capital." " Private long term 'credits' comprise alongwith other items deposits made into Non-Resident (External) Rupee Accounts and Foreign Currency Non-Resident Accounts." r Other items included are investments from abroad in shares of joint stock companies, investment in real estates, repatriation of Indian investments abroad, long term loans received by private individuals and institutions other than banking institutions in India. 64

Private long term capital 'debits' comprise alongwlth other Items outflows under Non-Resident (External) Rupee accounts and Foreign Currency Non-Resident accounts representing repatriation of balances in NR(E)R accounts and FCNR accounts. These outflows may Include both principal and interest. The other items included are repatriation of sale proceeds of shares in foreign controlled Indian joint stock companies, repatriation of foreign investments in real estates, long term loans extended to Non-residents by Individuals and private institutions in India other than banking institutions. The private short term receipts and paymaits cover transactions in the nature of short-term borrowings and repayments. (II) Banking Capital This item cover changes in the foreign financial assets and liabilities of commercial banks whether privately owned or government owned and co-operative banks which are authorised to deal in foreign exchange. An increase in assets or decrease in liabilities represents an outflow of capital or debit. (Ill) Official Capital It includes transactions affecting foreign financial assets 65

and liabilities of the Govt of India and Reserve Bank of India. Official capital transactions other than the use of IMF resources and the movements in the RBIs holdings of foreign currency assets and monetar/ gold are classified into (a) Loans (b) Amortisation and (c) Miscellaneous. Credits under 'loans' relate to drawals of loans/credits granted by foreign government and international institutions to Govt, of India and state governments. External commercial borrowings by public sector undertakings are also included under this head. Debits under 'loans' represent the disbursement of loans granted by Govt of India to foreign governments. Under 'Amortisation' credit entries show repayments to India of principal by foreign governments and debit entries represent payment by Govt, of India in respect of loans extended by foreign government, IJvT institutions as well as commercial borrowings by public sector organisations. Official 'Miscellaneous' capital transactions comprise (i) changes in balances in Central clearing accounts in non-convertible rupees maintained with RBI by Central Banks or foreign trade banks of the group of bilateral countries having rupee trade and payment agreemaits with India, (ii) Movements in balances of US Embassy in India maintained with RBI. (iii) Paymaits made towards the contribution of capital to international institutions, by Govt.of India are recorded here. 66

(C) I.M.F. This item records purchases (Credit) and repurchases (Debit) from the I. M. F. under its various facilities. (D) S.D.R. Allocation This item covers the allocation of SDRs (Special Drawing Rights) by IMF involving the creation of foreign assets which form part of holdings of official foreign exchange reserves of member countries participating in the SDR account of IMF. The item showing allocation (Credit) forms the counterpart that offsets the increase in holdings of official foreign exchange reserves as a result of such allocation. (G) Errors and Omissions As a result of the adoption of double entry recording system, the sum of all credits should^ In principle^ exactly equal sum of all debit entries for a given period. However, errors and omissions arise whenever (a) one side of transaction escapes recording (b) both sides are not Identical In records due to incomplete, incorrect information or due to inconsistency of sources used to collect information, (c) discrepancies in timings, coverage, and incorrect estimation. 67

A negative "Errrors-Omisslons" indicates that either receipts are overstated or payments are understated or both. A positive "Errors-Omissions" indicates overstatement of recorded payments or an understatement of receipts or both. The persistently large errors and omissions with the same sign indicate serious weakness in recording of transactions or flows. (H) Reserves and Monetary Gold The item includes changes in total foreign exchange reserves, (which consists of RBI holdings of gold and foreign exchange S SDRs held by Govt.of India on its own account) the movement in SDRs and the monetisation (or demonetisation) of gold, corrected for valuation changes. 3.4 Scenario of India's Balance of Payment While studying Balance of Payment scenario of India, reference to following is inevitable. i) Increase in Current account deficit ( C.A.D.) as a proportion to G.D.P. ii) Depleting stock of foreign exchange reserves both in absolute terms and in proportion of import requirement. iii) Increase in countries debt service ratio. 68

i) All the abovementioned aspects are more or less noticed while studying trends in India's BOP. To elaborate further on first aspect i.e. increase in current account deficit (CAD) as a proportion to GDP, a broad summary since the first oil shock 73-74 is made in a phased manner. The first oil shock of 73-74 caused some pressure on B O P. The current account which was in surplus of Rs.l302/- Crs. in 73-74 turned into deficit of Rs.644/- Crs. in 74-75 (Refer Table (II) at the end of the Chapter). But the economy was able to adjust first oil shock quickly. The export growth during the period 74-75 to 79-80 increased to 8.3% per annum mainly because of diversification of export base. The growth in import volume was confined to only 4.4%. Moreover, large inflow of expatriate remittances due to migration of workers to West Asia after the first oil shock raised earnings from invisibles. (As a result, the current account position for the period as a whole turned into surplus of Rs.3480/- Crs.) The foreign exchange reserves rose from US$ 1263 million (Rs.983/- C rs.) at end of March, 1974 to US$ 3744/- million (Rs.5934/- Crs.) by March, 1980. The debt service ratio was less than 10%. The balance of payment position was thus confortable at the start of 6th plan. In the early 8 0 's this position changed. With the sharp rise in prices of crude oil brought on by the second oil shock in 79, 69

the pressure on BOP intensified. In the year 80-81 i.e. the year following second oil shock imports shot up by Rs.2968/- Crs. or 31% while exports increased only by Rs.375/- Crs. or 6%. In 81-82 exports increased sharply by Rs.ll89/- Crs. or by 18% but this rise was not adequate to meet trade deficit as imports went up by Rs.l343/- Crs. The trade deficit shot up by Rs.2593/- Crs. to Rs.5968/- Crs. in 80-81 and further to Rs.6121/- Crs. in 81-82 (Refer Table (II) at the end of the Chapter). The rising trend in net invisible receipts (due mainly to a substantial increase in expatriate remittances) which was noticed in the second half of 1970's after the first oil shock continued in 80-81 but these too declined in 81-82 (Refer Table-II) as a result current account deficit rose 7 fold from Rs.240/- Crs. in 79-80 to Rs.1658/- Crs. in 80-81 and further to Rs.2317/- Crs. in 81-82 (Refer Table-II). The ratio of current account deficit to GDP went up significantly from -0.16% in 79-80 to -1.22% in 80-81 and further to -1.45% in 81-82 (Refer Table-Ill at the end of the Chapter). To meet the difficult BOP situation, India borrowed from IMF Rs.234/- Crs. under the compensatory finance facility (CFF) and Rs.545/- Crs. from IMF Trusts Fund in 80-81. India also negotiated an extended fund facility (EFF) of SDR 5 billion with IMF in N o v.'81. From 82-83 onwards there was a steady improvement in the BOP. The ratio of current account deficit to GDP came down from -1.45% in 81-82 to -1.24% in 70

84-85 (Refer Table-Ill). The reserves at the end of 6th plan stood at Rs.7243/- Crs. equivalent of 4.7 months of 84-85 imports. With the progressive improvement in the BOP especially at the end of 6th plan, India did not consider it necessary to utilise EFF facility. Out of SDR 5 billions negotiated with IMF, only SDRs 3.9 billion were utilised. However, it needs to be noted that whatever improvement in the BOP, during this period, was due mostly to reduction in the oil import bill because of sharp increase in domestic production of crude oil. The adjustment was limited and position started deteriorating once the oil import bill started increasing. The current account deficit during the 6th plan period was financed to the extent of 55% by external assistance and 28% through use of IMF resources. The inflows under Non-Resident Deposit schemes, Non-Resident External Rupee Accounts (NRERA) and Foreign Currency Non-Resident Account schemes (FCNR) provided considerable support to BOP particularly in the last year's of plan by financing 16% of total current account deficit during the plan period. During the 7th plan period sustained strains on BOP were experienced. The large current account deficit was combined result of large trade deficit and reduction in net invisible receipts. There was 43% increase in trade deficit which was accompanied by 6% fall in net invisible receipts. As a result the current account deficit more than doubled from Rs.2872/- Crs. in 84-85 to Rs.5956/- Crs. in 85-86. (Refer 71

Table-II). As a proportion of GDP current account deficit went from 1.24% in 84-85 to 2.26% in 85-86 (Refer Table-Ill). The net capital inflow financed 91% of current account deficits and balance was met by drawing down on reserves. In 86-87 i.e. in 2nd year of the 7th plan BOP improved little. The current account narrowed down to Rs.5831/- Crs. in 86-87 (Refer Table-II) and current account to GDP fail from -2.26% to -1.99% (Refer Table-Ill). The contraction in current account deficit was due to fall in trade deficit from Rs.9586/- Crs. in 85-86 to Rs.9354/- Crs. in 86-87 (Refer Table-II). This was due to growth in exports by 15% which more than offset rise in imports by 7%. The level of reserves at the end of M a r c h,'87 stood at Rs.8151/- Crs. which constituted 4.3 months of imports. During 1st three years of 7th plan for which BOPs final data was available, loans by way of external assistance from multilateral and bilateral donors provided 31% of the financing need which was much lower than 55% in the 6th plan period. About 25% each by way of commercial borrowings and Non-Resident Deposits under " f CNR Scheme" (FCNR Account) and "Non-Resident External Rupee Account" (NRERA) scheme and about 8% from other capital transactions and 12% by drawing down the reserve. There has been substantial inflow of funds in the 7 th plan under FCNR and NRE Accounts. The outstandings under these schemes shot up from Rs.3819/- Crs. at end of M a rch,'85 to R s.14154/- Crs. by end of M a rch,'89 (Refer Table-VTI at the end of 'Chapter- IY). 72

ii) In the phasewise study above of trends in B O P, a reference to foreign exchange reserves has been made. It is fact that country in the development process needs net inflow of foreign exchange resources to supplement domestic savings so as to achieve a higher level of investment and growth. Indian economy has been facing severe foreign exchange crunch. The large deficits in BOPs exerts pressure on the foreign exchange reserves of the country i.e. foreign currency assets of RBI, Gold holdings of RBI, and SDRs of IMF. However, there are certain limits beyond which these reserves cannot and infact should not be drawn because sizeable volume of foreign exchange is required to meet normal fluctuations in trade and unforeseen contingencies. It is advisable to keep an amount of these reserves equivalent to minimum of 3 months of merchandise imports. The SDRs and drawals of IMF are not self owned reserves of country. These are the sources which country can tap with cost i.e. payment of interest under specified conditions to specified amounts and returnable under specified rules with penalties attached to defaulters. Incidentally, researcher would like to state that it is in this sense so called borrowings in the form of FCNR Deposits being 'unconditional' are certainly preferred to such external borrowings (IMF borrowings, SDRs etc.) 73

The Table-r/ given below depicts movements In foreign exchange reserves.- (All fig. In Rs. C rs.) Year FEx reserves at the end of the year * Movements In Reserves Net drawals on IMF 1980-81 5541-390 814 1981-82 4024-1520 637 1982-83 4782 758 1893 1983-84 5972 1190 1342 1984-85 7243 1271 63 1985-86 7820 577-327 1986-87 8151 331-840 1987-88 7687-464 -1388 1988-89 7040-647 -1749 1989-90 6251-789 -1688 1990-91 11416 5165-2043 1991-92 19392 7976 2169 (Upto Jan. end) * Includes foreign currency assets of RBI, Gold holdings of RBI, and SDR holdings of government. @ Includes trust fund loan drawals and repayments. [Source : Economic Survey 1991-92, Part-II] Before we turn to the aspect of financing of external deficit, we shall have a quick look over third aspect i.e. "rise in debt service ratio". 74

iii) The country has undergone large increase in debt burden to meet current account deficit. This burden had arisen on account of 'external assistance' or 'foreign aid' (i.e. return of loan and payment of interest), 'IMF credits'. The economic survey 91-92 shows outstanding External debt (Medium + Long Term) for the year 90-91 as R s.100425/- Crs. which constituted 19% of GDP. Including NRI deposits, the country's external debt stood at R s.121200/- Crs. (other than short term debt) which constitutes about 23% of GDP. If we add estimates of short term debt of maturities upto one year, Indias External debt amounted to R s.130700/- Crs. which is around 25% of GDP. The Govt.of India's figure includes medium and long term liability and covers commercial borrowings as well as IMF borrowings, in addition to loans under government and non-govemment accounts, but excludes 'short term liability' and 'NRI Deposits'. International organisations however take into account 'short term liability' and 'NRI Deposits' and naturally therefore the outstanding debt according to international organisation is indicated at a much higher level. The most alarming aspect of our external account is the rising debt service ratio, with increasing amortisation and interest payments of the past borrowings. Our debt service ratio crossed the usually accepted prudent limit of 20% in 1986-87. However, debt service ratio in 1990-91 was placed at 22% largely due to 75

higher export earnings. This debt service ratio relates to debt outstanding which excluded short term debt and NRI Deposit liabilities. If these are taken into account this ratio would be much higher (Refer Table-VI at the end of Chapter). What often goes unnoticed is the fact that generally we just do not have foreign exchange necessary (i.e. current account surplus in BOP) to make the debt servicing payments. So even, these debts servicing payments are managed only by further borrowings. 3.5 Sources to Finance Deficit Since 8 0 's there has been tendency for India's current account deficit to widen as a proportion of Gross domestic product (Refer Table-Ill at the end of Chapter). This has necessitated to secure adequate inflow of external finance. In case of India's external borrowings on concessional terms (Refer 'A ' in the Table-V given below) it is observed that debt charges (interest and amortisation) have increased at a rate faster than gross disbursemait of external loans. It is evident from table that during year 86-87 and 87-88 the net external assistance to have been 45% of gross disbursement in that year as against 50% in previous years. Excluding the official (concessional) sources of assistance external finance is available from IMF (Refer ' C in Table-V) from external commercial borrowings (E C B 's) including suppliers credit (Refer 'B ' in Table-V) and from NRI Deposits (Refer 'D ' in Table-V) in India 76

on short term basis, and from further depletion of exchange reserves. Out of above, flow of finance from fund is negative. As regards other two sources of external finance both of which are available on commercial terms, have much significance. In a table during 88-89 the gross inflow of NRI Deposits has been comparable to the flow of gross disbursement of ECBs. Both have exceeded Rs.4000/- Crs. during the year. Table No. V is on the next page 77

TABLE NO. V Year Outstanding S disbursed Gross Disbursement Interest and Amortisation Net inflow A] External Assistance 1984-85 27462 2354 1176 1178 1985-86 27397 2938 1367 1571 1986-87 33201 3596 2029 1567 1987-88 33426 5032 2623 2409 1988-89 48002 5291 2946 2345 B] External Commercial Borrowings (ECB) including suppliers credit 1984-85 6413 1084 682 402 1985-86 7647 1234 1175 59 1986-87 10321 2674 1565 1099 1987-88 12635 2314 1813 501 1988-89 17482 4847 2135 2712 Cl I.M.F. 1984-85 4550 63 1985-86 4665 115 368-253 1986-87 4826 162 833-672 1987-88 4348-478 1687-1209 1988-89 3347 1001 1995-954 D] Non-Residont Indian (NRI) Deposits 1984-85 3819 1985-86 5650 1831 -- 1986-87 7847 2197-1987-88 10054 2207-1988-89 14154 4100 Source ; Economic Survey, 1989-90 Economic Advisory Council's Report, Ministry of Finance, Government of India, D e c.1989. 78

To sum of, as stated in Economic Survey, 1991-92, India entered the decade of nihrties with large internal and external financial imbalances which made the economy highly vulnerable to exogenous shocks. These imbalances were exacerbated by the Gulf crisis and uncertain and disturbed situation in the domestic policy during 1990-91 and first quarter of 1991-92. The Gulf crisis resulted in a higher import bill and loss of export market and remittances. Taken together these developments contributed to erosion of international confidence in India. The international credit agencies started placing India either under watch or downgraded credit rating of Indian entities between A u g.,'90 and J u ly,'9 1. It became exceedingly difficult to get access to international capital markets and there was massive erosion in the net accruals under non-resident deposits. Economic Survey further states that all these developments culminated in severe external liquidity crunch and a crisis of unprecedented dimension. The very aim of this research is, to critically study FCNR scheme against background of "Balance of Payment" position of India. Researcher is of view that neither measures of export boosting or import curbing will provide ultimate solution to the present critical situation. If current account side of BOP continues to RO deeper in red something extra needs to be done on capital account side of B O P. Researcher feels that NRI deposits can be more effectively used as supplementary to various measures, in financing current account deficits, thereby tackling BOP problem. With above intention in mind the Researcher has paid attention particularly (out of various items in 'Capital account' side of BOP that have been referred to in this chapter) on item 'PRIVATE CAPITAL' that comprises of transactions in Non-Resident deposits in the chapter to come. 79

TABLE NO. II Fofoian LALlmoke aralnga Uad,ar VnjlQoa Heada i 1951-52 lo 19A9-9Q (R». cror) Trade Tra- Trane- In- Inv<sB- Govt.not Mloco- Official Private Net Currant bal<i- v«l port- eu- tnent Included liana- tranater tranoter Invla- accourt nee tlon ran- IncoBXi anyvh«r«ouo paymante i*aymante Ibleo balwice ce earnlnfis 19J.I-52 l'j52-53 1963-54 1954-55 -233-31 -52-87 -13-1 -6-4 27 12 21 24 7 6-18 -9-3 -5 7 8 9 10 14 18 16 13 5 11 19 16 42 46 41 34 71 91 100 93-162 60 48 6 1955-50 -106-0 23 4 0 11 13 45 37 126 20 1956-57 -440 4 30 4 9 6 12 40 48 145-295 1957-50 -506 9 28 4-5 14 9 34 46 123-383 1958-59 -471 10 27 4-20 26 3 36 41 122-349 1359-60 -301 10 24 3-34 37-5 38 40 100-201 19G0-G1-476 3 20 2-48 30 2 45 28 83-393 1961-62 -310 4 21 2 -C8 35-3 46 25 24-285 1&62-63 -407 4 22 3-84 25-11 77 26 54-353 1963-64- -429?. 2B 3-92 45-10 84 34 88-341 196<-l>i -593-8 24 2-108 61-10 124 35 141-453 1965-G6-553 1 26 6-123 50-21 67 72 77-476 1966-67 -807-13 36 6-186 78-22 7 87-7 -814 1967-68 -768-12 34 5-209 56-16 22 104-16 -804 1968-69 -374-10 34 4-214 27-1 40 128 8-366 1969-70 -178 17 28-1 -218 8-16 19 125 1S70-71 -422 10 28-1 -255 7-23 63 123-37 -459 1971-72 -439 12 43-5 -227 5-28 76 162 36-403 1972-73 -251 19 51 5-256 8-24 43 154-1 -252 JS73 74-378 40 37 8-263 11-35 1.692 191 1,680 1,302 1974-75 -977 79 84 13-165 44-4 8 274 333-644 1&75-76 -566 168 64 14-169 72 9 178 528 860 294 1076-77 316 247 65 21-126 31 11 216 739. 1.205 1,521 1977-78 -107 486 66 3-95 34 52 270 1.023 1.838 1.731 1976-79 -1.843 501 45-2 8 23 76 296 1,043 1.989 146 1979-80 -3,375 832 66 15 264-1 -4 339 1.624 3.135-240 1980-81 -5,968 1,076 7 14 484 40-6 438 2,257 4.310-1,658 19H1-82 -6.121 920-85 15 339 71 29 284 2.221 3.804-2,317 1982-83 -5,776 946-291 -11-283 43 279 270 2.627 3.480-2,296 1983-84 -5.870 834-276 39-544 20 505 255 2.7 7 5 3.609-2,261 1984-85 -6,721 469-274 5-906 21 1.064 440 3.101 3,849-2,872 l9«5-86 -9,586 778-212 -6-950 -7 899 307 2.821 3.630-5,956 1980-87 -9.354 1,236-60 -19-1,250-3 118 525 2,976 3.524-5,831 1987-ea -9.297 1,368-246 -1-1,734-61 -353 532 3,498 3.003-6,294 1980-Q9 1989-90 -13,555-12.939 1,467-187 41-2,478-94 -170 724 3.842 3.146 2.541-10,409-10,391 (source - C.M.I.E. Publication, A u g. " 9 l ) 80

TABLE NO. Ill Pftymanla: Ir&de^ Currnnt and Capital A c c o u n t : iflas-aa ua 19B9-9Q (Ab X of GDP at currant siarket prlcea) tear Exports Imports Trado balanoa Grosa invialbla arnlnbs Not Invlalbla earnlnga Current account balance Hot capital in flow 1955-66 6.26 7.2 9-1.03 2.3 6 1.23 0.2 0 0.23 1956-57 6.21 8.82-3.60 2.10 1.20-2.40 2.43 1957-50 5.31 9.33-4.02 1.90 1.02-2.99 2.85 1958-59 4. 10 7.46-3.35 1.77 0.94-2.42 2.28 1959-60 4.21 6.25-2.03 1.63 0.77-1.22 1.28 iygo-61 3.90 6.72-2.81 1.68 0.66-2.25 1.89 lyfil-62 3. 69 5. 69-1.80 1.32 0. 19-1.62 1.55 1062-63 3.69 5.89-2.20 1.49 0.40-1.81 1.67 1963-64 3.78 5.80-2.02 1.51 0.44-1.58 1.75 1964-65 3.24 6.64-2.39 1.60 0.57-1.76 1.63 1965-66 2.99 5.11-2.12 1.34 0.31-1.61 1.53 1966-67 3.65 6.38-2.73 1.33-0.02-2.75 2.57 1967-68 3.61 5.87-2.26 1.22-0.05-2.31 2.35 196B-69 3.71 4.72-1.01 1.26 0.02-0.99 1.20 1969-70 3.46 3.09-0.44 1.08-0.10-0.53-0.02 1970-71 3.28 4.23-0.98 1.15-0.09-1.03 1.18 1971-72 3.36 4.31-0.95 1.17 0.08-0.87 0.80 1972-73 3.72 4.21-0.49 1.03 - -0.49 0.49 1373-74 3.79 4.40-0.61 3.64 2.71 2. 10-1.63 iav4-75 4.34 5.68-1.33 1.23 0.45-0.88 1.29 1975-76 5.30 6.02-0.72 2.04 1.09 0.37 0.72 1976-77 6.05 5.67 0.37 2.83 1.42 1.80 0,23 1977-78 5.66 5.77-0.11 2.92 1.91 1.81-0.17 1978-79 5.33 7.10-1.77 3.00 1.91 0.17 0.23 1979-80 4.30 6.63-2.34 3.16 2.17-0.16 0.41 1980-81 4.84 9.24-4.39 4.34 3.17-1.22 0.67 10U1-U2 4.87 8.71-3.84 3.65 2.39-1.45 0.31 1982-83 5.15 8.40-3.25 3.44 1.98-1.29 0.46 1983-84 4.92 7.75-2.84 3.33 1.74-1.09 1.06 1984-85 6. 18 8.09-2.91 3.67 1.67-1.24 1.47 19U5-86 4.41 8.06-3.65 a.00 1.38-2.26 1.66 1986-87 4.54 7.73-3.19 2.82 1.20-1.99 2.01 IUM7-R8 4.93. 7.73-2.80 2.62 0.90-1.89 2.25 lu8a-89 5.23 8.66-3.35 2.77 0.80-2.63 2.60 1989-90 8.30 9.30-2.92 2.37 0.S7-2.34 2.33 (source - C.M.I.E. Publication, A u g. 91.) 81

TABLE NO.VI PRINCIPAL DEBT RATIOS (%) YEAR TOTAL EXTERNAL DATE TO GNP DEBT SERVICE RATIO 1984-85 15.54 13.60 1985-86 15.24 17.50 1986-87 16.66 21.80 1987-88 16.56 24.00 1988-89 17.68 25.00 1989-90 18.21 21.60 1990-91 19.43 22.00 (Source CMIE publication- Aug.'91 ) 82