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Balance of Payment of India on Current Account

Balance of Payment of India on Current Account

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Published by Bhushan Kanekar

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Published by: Bhushan Kanekar on Nov 08, 2010
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12/09/2011

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 Balance of Payment of India on Current Account:
The balance of payment position of India relating to current account during the first five year planwas quite satisfactory. During this period the inflow of foreign capital was Rs. 13.60 crores and theforeign exchange reserve was Rs. 127 crores. The deficit of the current account was only Rs. 42.30crores. India enjoyed surplus inn current account of balance of payment during 2001-02 to 2004-05due to increase in net invisible, but suffered from deficit in 2005-06.The balance of trade experienced a deficit of Rs. 2339 crores during the second five year plan. Theinvisible positive balance reduced this deficit of Rs. 1725 crores.The current account deficit during the third five year plan was Rs. 1941 crores.The fourth five year plan experienced a surplus position of Rs. 100 crores in the current account of the balance of payment position. The reason for this position was the export promotion measurestaken by the government and increase in the invisible receipts.During the fifth plan period the trade deficit increased to a maximum of Rs. 3179 crores. Thisposition was due to increase in the oil price. However, the increase in net invisible to Rs. 6221crores, resulted in favourable balance of payment to the tune of Rs. 3082 crores.The sixth five year plan set a different trend of experiencing heavy deficits. In fact, it was started inthe year 1979-80.The trade deficit during the sixth plan was Rs. 30456 crores. But the net invisibles (Rs. 19072) helpedto reduced the deficit of the balance of payment to Rs. 11384 crores.The period during 1985-86 to 1989-90 witnessed a trade deficit of Rs. 54204 crores. The net invisibleRs. 15891 crores stopped the deficit of the balance of payment of Rs. 38313 crores.
 
R
eason for deficit balance:
The Indian economy has been facing the problem of heavy deficit in the balance of payments. Theproblem has been acute since fifth five year plan. The mounting deficits in the balance of paymentshad been due to:The government of India liberalised imports in 1985 by announcing liberalised export-import policy.This policy led to the increase in the imports significantly.Despite the growth of Indian economy and exports, the increased demand for resulted in wideningof import base. In fact, the rate of imports was lower than that of the exports during the seventhplan.The gulf war has influenced the Indian economy adversely. This has contributed vitally for the 1990-91 balance of payments crises.The rapid industrialisation led to the import of the capital goods, import of technology, machinery,technical personal etc. This factor, in turn, resulted in increase in importsThe slow growth of invisible accounts and increase in the interest burden also increased the deficitof the balance of payments.The devaluation/depreciation of rupee against the currency of the countries from which we havebeen importing, increased the value of our imports. This in turn enhanced the balance of paymentdeficit.The 1990-91 balance of payment crisis and the political instability made the government to borrowmassively from the IMF.The discouraging export performance after 1991-92, despite of the positive steps taken by thegovernment, resulted in the increase in the deficit in the balance of payments. These factorsresulted in fall in foreign exchange reserves. However increase in the net invisibles and FDI enhancedthe foreign exchange reserve.Heavy imports of capital goods due to the fast growth of the economy during 2005-06.
 
R
easons for deficit in Capital Account:
C
apital account structure has changed considerably over the period. Most of the deficit was financedthrough the inflow of concessional assistance during the period 1956-57 to 1979-80. This facilityreduced the debt servicing burden. But almost the entire deficit was financed through loans atmarket rate of interest durin1980-81 to 1997-98. The loans at concessional interest rates was nearly90 per cent of the total in 1980 and it declined to 80 percent in 1990.The average maturity period of loans was 40.8 years in 1980 and 29.1 years in 1990 The interest rate were increased during the period 1980-81 to 1998-99 compared to that of 1956-57to 1979-80Decline in the quality of external financing during the year 1980-81 to 1998-99.Total debt increased from Rs. 19470 crores in 1980-81 to Rs. 336646 crore in 1996-97.Substantial amount of current account deficit has been financed from the inflow of capital since1984-85.
C
urrent account deficit was financed from the funds drawn under extended fund facility frominternational monetary fund during 1980-81 to 1984-85. The amount drawn was Rs. 5 billion.
Balance of payment:
Government of Indian has drawn substantially from the international monitory fund in 1990-91consequent upon the deteriorating balance of payment position due to the impact of gulf warOur country has drawn Rs. 2077 crores in 1991-92 and Rs. 3363 crores in 1992-93 under the standbyarrangement from the fund.The increased trade deficits, declining private remittances and decreasing concessional aid tofinance the balance of payments deficit, made India resort to high cost sources of finances likecommercial borrowings, NRI deposits and loans from IMF. NRI deposits and commercial borrowingrepresent a substantial failure liability.Increased outflow of foreign capital and declining inflow during 1990-91, to 1992-93 seriouslyaffected the foreign exchange reserve position. This in turn downgraded Indias credit rating.There has been a slight improvement in the Indias external debt position. It declined from US$ 99billion at the end of march 1995 to US$ 92.2 billion at the end of march 1997.There is structural change in the capital account. This change relates to reduction in debt creatingflows and an enhanced resource to non-debt creating foreign investment flow since 1993-94.

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