17-05-2013, 04:54 PM
India’s Balance of Payments Crisis and it’s Impacts
India’s Balance.ppt (Size: 4.15 MB / Downloads: 26)
Definition
An accounting record of all monetary transactions between a country and the rest of the world.
Summarises international transactions for a specific period, usually a year
Prepared in a single currency, typically the domestic currency
Indicator of economic and political stability
Visible Items: All types of physical goods exported/imported
Invisible Items: All types of services
Capital transfers: Capital receipts/payments
Components of BoP
Current Account
Import and Export of goods
Import and Export of services
Unilateral transfers from one country to another
Capital Account
Foreign Investment
FDI & portfolio Investment
Loans
Commercial Borrowings, External Assistance & Banking Capital Transactions
Uses of BoP Analysis
Overview of Macroeconomic and Monetary situations of the economy
Study on prospects of direct investment to the nation
Implications on the exchange rate of the currency
Provides data for economic analysis
Reveals changes in the composition & magnitude of foreign trade
Provides indications of future repercussions of country’s past trade performances
Reveals the weak and strong points of a country’s foreign trade relations
BoP crisis- Factors and causes
Economic factors
Huge development expenditure owing to which there are large scale imports
Business cycles in terms of recession, depression, recovery and boom
High rate of inflation running up to large scale imports of essential goods
Decline of import substitutes which would necessitate and increase in imports
Change in cost structure of trading partners
Political factors
Political Instability leading to decline in FDI and FII
Populism policies which may encourage imports
Social factors
Change in tastes and preferences leading to demand changes
Cross border prejudices which may lead to expensive sources of imports
Economic Policies
Protectionist Policies- defined objective of self reliance through industrialization and import substitution
Focus was on substituting imports and promoting domestic industries by heavy intervention while a gross negligence on exports
External Debt- The development projects caused a large scale foreign borrowing which created pressure on the government
Trends in Pre BOP crisis period
Capital inflows mainly consisted of aid flows, commercial deposits and Non resident Indian deposits
FDI was heavily restricted and foreign portfolio investments generally channelized to public sector issued bonds
Gradual loss of for-ex reserves and deterioration of trade balance due to fixed nominal exchange rate which was declining over the 1980s
Developments in 1991
Current account deficit averaging 2.2% of the GDP hit hard by the Gulf war
Triggers
oil bill increased by $2 billion
overseas markets for exports shrinked (West Asia, Soviet Union)
Fall in remittances
The Reserve Position in IMF of $660 million was drawn in full by September, 1990 to add to the reserves
The international credit rating agencies placed India on the “watch list” in August 1990
Short term Structural changes
Two-step downward adjustment in the exchange rate of rupee was effected on July 1 and 3, 1991
This effectively translated into devaluation of 18-19 per cent against major international currencies
This was coupled with the liberalisation of the trade regime and lower import tariffs
Besides exceptional financing arrangements with the World Bank, Asian Development Bank and a few industrial countries were also negotiated
Due to the currency devaluation the Rupee fell from 17.50 per dollar in 1991 to 26 per dollar in 1992
Balance of Payments: Policies
Government allowed Reserve Bank of India to ship 47 tonnes of Gold to the Bank of England in July 1991.
Short-term debt was reduced and strict controls put in place to prevent future expansion
Foreign exchange reserves were consciously accumulated to provide greater insurance against external sector stresses and uncertainties
Effects of Liberalization
BOP Surplus:
External sector - growth rates moving up to 11 and 20% in the two years ended March 2001
India successfully withstood the sharp rise in international oil prices since the closing months of 1999.
NRI deposits with the banking system in India on the rise from 13 billion dollars in 1991-92 to 23.8 billion dollars by March 2001
BOP recorded an overall surplus consecutively for five years from 1996-97
India’s foreign exchange reserves, 1 billion in 1990 reached $ 40 billion the average annual addition being 4.5 billion dollars