TRENDS IN BALANCE OF PAYMENTS SINCE

LIBERALISATION

India has always had a huge deficit on current accounts. The gap between payments
and receipts is mainly bridged by external aid (especially non-project assistance),
tourism earnings, and remittances from Indians working abroad. The main factor
behind declining foreign exchange reserves was heavy imports of food grains and
armament purhases. An economic recovery from 1968–69, however, eased the
problem, and by September 1970, foreign exchange reserves increased to $616
million, as compared with $383 million by December 1965. There was ups and
downs in the foreign exchange reserves. Reserves declined to $566 million by the end
of 1972 but again increased to $841 million as of December 1975, despite massive
deficits on current accounts, which was attributable to the quadrupling of oil import
prices during 1973–74. Foreign exchange reserves declined from $6,739 million at
the end of 1979 to $3,476 million as of November 1982 but subsequently rose to
$5,924 million by March 1987. The ratio of current account deficit to GDP was
worsened by the Gulf War crisis. Foreign exchange reserves plummeted because of
export losses in Kuwait, Iraq, and other nations. Remittances from Indian workers
fell, and sudden price increases for oil imports caused an estimated loss to India of
over $2.8 billion in earnings. By November 1993, however, India's foreign exchange
reserves had risen to $8.1 billion, the highest level since 1951. There was recovery of
reserves because of the factors like substantial reduction in the trade deficit, increased
inflows from foreign institutional investors, a stable exchange rate, and improved
remittances. Although export growth remained strong, the current account deficit
tripled from 1993–94 to 1995–96. This was due to a continuing surge in imports and
higher debt service requirements. India's total external debt in 2001 was estimated at
$100.6 billion. In 2000, the external debt-GDP ratio stood at around 20.7%, down
from 41% in 1991/92. In the early 2000s, India's exports to East and Southeast Asia
increased, including to Japan and South Korea.

The US Central Intelligence Agency (CIA) reports that in 2001 the purchasing power
parity of India's exports was $44.5 billion while imports totaled $53.8 billion
resulting in a trade deficit of $9.3 billion. The International Monetary Fund (IMF)
reports that in 2000 India had exports of goods totaling $43.1 billion and imports
totaling $55.3 billion. The services credit totaled $18.3 billion and debit $19.9 billion.
The following table summarizes India's balance of payments as reported by the IMF
for 2000 in millions of US dollars.
BALANCE OF PAYMENT AROUND EAST ASIAN CRISIS-97

India’s balance of payments withstood fairly well the turbulence in the international
economic and financial markets. Balance of payments in 1997-98 remained on the
positive side with substantial reserve accumulation for the second year in succession,
supported by strong private capital flows. Though export growth has slowed down
sharply over the last three years because of both international and domestic factors.
Total import growth also decelerated. Net inflows on the invisibles account was
buoyant in 1997-98, benefiting from sustained growth in software exports. The deficit
on the current account of the balance of payments widened to U.S.$ 6.5 billion or 1.6
per cent of GDP in 1997-98 from 1.1 per cent of GDP in 1996-97.The widening of
the current account deficit in 1997-98 was largely attributable to poor export growth.
The BOP situation was manageable in 1998-99, despite the continuing slowdown of
exports and a marked deceleration in capital flows. In 1998-99, the current account
deficit, as a per cent of GDP, is expected to decline somewhat from the 1997-98
level, mainly because of slower growth of imports on a BOP basis.

The capital account of the balance of payments exhibited a handsome surplus of U.S.
$10.4 billion in 1997-98, following sustained buoyancy in foreign direct investment
and external commercial borrowing, while portfolio inflows fell sharply. The surplus
in the capital account of balance of payments in 1997-98 exceeded the deficit in the
current account by a substantial margin, resulting in large accretion to foreign
exchange reserves amounting to U.S. $3.9 billion

BALANCE OF PAYMENT

1990- 1991- 1992- 1993- 1994-

91 92 93 94 95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
1. Exports 18,477 18266 18869 22683 26,855 32,311 34,133 35,680 34,298 37,542 44,894
2. Imports 27,915 21064 24316 26739 35,904 43,670 48,948 51,187 47,544 55,383 59,264
Of which : POL 6,028 5364 6100 5753 5,928 7,526 10,036 8,164 6,399 12,611 15,650
3. Trade balance -9,438 -2798 -5447 -4056 -9,049 -11,359 -14,815 -15,507 -13,246 -17,841 -14,370
4. Invisibles (net) -242 1620 1921 2898 5,680 5,449 10,196 10,007 9,208 13,143 11,791
Non-factor srvces 980 1207 1129 535 602 -197 726 1,319 2,165 4,064 2,478
Invest. Income -3,752 -3830 -3423 -3270 -3,431 -3,205 -3,307 -3,521 -3,544 -3,559 -3,821
Pvt. transfers 2,069 3783 3852 5265 8,093 8,506 12,367 11,830 10,280 12,256 12,798
Official transfers 461 460 363 368 416 345 410 379 307 382 336
5. Current
Account Balance -9,680 -1178 -3526 -1158 -3,369 -5,910 -4,619 -5,500 -4,038 -4,698 -2,579
6. External
assistance (net) 2,210 3037 1859 1901 1,526 883 1,109 907 820 901 427
7. Commercial
borrowing (net)@ 2,248 1456 -358 607 1,030 1,275 2,848 3,999 4,362 313 4,011
8. IMF (net) 1,214 786 1288 187 -1,143 -1,715 -975 -618 -393 -260 -26
9. NRI Deposits
(net) 1,536 290 2001 1205 172 1,103 3,350 1,125 960 1,540 2,317
10. Rupee debt
service -1,193 -1240 -878 -1053 -983 -952 -727 -767 -802 -711 -617
11. Frn invst (net) 103 133 557 4235 4,807 4,615 5,963 5,353 2,312 5,117 4,588
(i) FDI (net) 97 129 315 586 1,228 1,954 2,651 3,525 2,380 2,093 1,828
(ii) FIIs 0 0 0 1665 1,503 2,009 1,926 979 -390 2,135 1,847
(iii) Euro equities
& others 6 4 242 1984 2,076 652 1,386 849 322 889 913
12. Other flows
(net)+ 2,284 101 -245 2800 2,604 -2,235 -1,131 -606 608 3,940 -2,291
13. Capital
account total (net) 8,402 4563 4224 9882 8,013 2,974 10,437 9,393 7,867 10,840 8,409
14. Reserve use
(- increase) 1,278 -3385 -698 -8724 -4,644 2,936 -5,818 -3,893 -3,829 -6,142 -5,830

BALANCE OF PAYMENT SINCE 2000-07

A distinguishing feature of India’s external sector developments was the expansion

of the merchandise trade deficit to more than five per cent of GDP from an average
of a little below three per cent of GDP. Underlying this expansion in the trade deficit
was a surge in oil imports on the back of the soaring international crude oil prices and
the pick-up in investment demand as well as the growing strength of domestic
industrial activity.

The strength, resilience and stability of the country’s external sector is reflected by
various indicators. The current account had followed an inverted “U” shaped pattern
during the period from 2001-02 to 2006-07.Despite the large trade deficit, the current
account recorded only a modest deficit of less than one per cent of GDP in 2004-05
after a continuous run of surpluses over the three-year period, 2001-2004.

The high trade deficit during 2004-05 was to a large extent accommodated by the net
invisible surplus at five per cent of GDP, supported by buoyant services exports and
sustained remittances from migrant workers overseas. In fact, invisible surpluses
have traditionally provided valuable support to India’ s balance of payments and in
recent years, they have taken on the character of a permanent component in the
current account.

Reasons Behind the BOP Condition:-

1) Lessons of the 1991 crisis brought forth policies which ensured a low current
account deficit in the coming years. This approach stood us in good stead in
warding off the contagion from the Asian crisis of 1997-98.
2) 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.
3) The low current account deficit was underpinned by shifts in international
competitiveness favoring software, IT exports and workers’ remittances over
traditional exports.
4) The fiscal deficit remained somewhat inflexible, it was not allowed to spill
over into the current account.

The adverse international experience with unfettered capital account

liberalisation, India have been risk averse and have adopted a policy of active
management of the capital account. The compositional shifts in the capital
account have been consistent with the policy framework, imparting stability to
the balance of payments.

The initiation of gradual liberalization of the capital account in 1991, capital

flows have been in excess of current account deficit (CAD) except, in 1992-93
and 1995-96, adding to the reserves. It is interesting to note that the stock of
external debt came down steeply from 28.7 per cent of GDP at the end of
March 1991 to 17.4 per cent by March 2005. The decline in debt reflected the policy-
induced shift in the composition of the capital account in favor of non-debt flows.

The foreign direct investment increased from less than one per cent of net capital
flows in the 1980s to 20 per cent of net capital flows in 2004-05. Total portfolio
investment flows on account of FIIs, GDRs and others were US$ 8.9 billion in 2004-
05.

Capital inflows, as a proportion of GDP, have been on a clear uptrend during the six
years (2001-02 to 2006-07) of this decade. They reached a high of 5.1 per cent of
GDP in 2006-07 after a somewhat modest growth rate of 3.1 per cent in 2005-06.
The net result of these two trends has been a gradual rise in reserve increase to reach
4 per cent of GDP in 2006-07. With capital inflows exceeding financing
requirements, foreign exchange reserve increase was of the order of US$ 15.1 billion
in 2005-06 and US$ 36.6 billion in 2006-07. As a proportion of GDP, external debt
was 17.2 per cent and 17.9 per cent in 2005-06 and 2006-07.Thus, the rupee faced
upward pressure in the second half of 2006-07; but on an overall yearly average
basis, it depreciated by 2.2 per cent.

BALANCE OF PAYMENT BEFORE RECESSION

In 2007-08, India imported 120.1 million tonnes of crude oil, more than 3/4th of the
domestic demand, at a cost of $61.72 billion. India is still a net importer, since 1996–
97 its overall balance of payments (i.e., including the capital account balance) has
been positive, largely on account of increased foreign direct investment and deposits
from non-resident Indians; until this time, the overall balance was only occasionally
positive on account of external assistance and commercial borrowings. As a result,
India's foreign currency reserves stood at $285 billion in 2008.

Due to the global late-2000s recession, both Indian exports and imports declined by
29.2% and 39.2% respectively in June 2009. The steep decline was because countries
hit hardest by the global recession, such as United States and members of the
European Union, account for more than 60% of Indian exports. However, since the
decline in imports was much sharper compared to the decline in exports, India's trade
deficit reduced to 252.5 billion rupee.

India's reliance on external assistance and commercial borrowings has decreased

since 1991–92, and since 2002–03, it has gradually been repaying these debts.
Declining interest rates and reduced borrowings decreased India's debt service ratio to
4.5% in 2007. In India, External Commercial Borrowings (ECBs) are being permitted
by the Government for providing an additional source of funds to Indian corporates.
The Ministry of Finance monitors and regulates these borrowings (ECBs) through
ECB policy guidelines.

Current a/c balance, total capital a/c and reserve change

Balance of Payments: Summary

(in US $ Million)

Trade balance, goods & services balance and non-factor services (net)