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Discuss the Balance of Payment Deficits in India.

Discuss the Balance of Payment Deficits in India.

Owlgen
Course: M.Com

1 Answer

For India, mostly the main cause of deficits in balance of payment has been excess of imports over exports in merchandise. Sometimes, but to a very small extent, the deficits have come from invisible trade also. The major source of deficits is generally the increasing obligation to satisfy the amortization payments. This involves big chunk of money for overdue installments of loans and even larger interest payments thereon. Large withdrawal’s from non-resident accounts have also be a factor to deficits.

On June 21, 1991 when a new Indian government came to power, the Indian economy was in deep crisis. The balance of payments situation was precarious, with reserves at a lowest possible level. International confidence was completely shaken and had led to a sharp decline in capital inflows through commercial borrowing and non-resident deposits. The crisis in the Middle East i.e. the Gulf War worsened the situation further by forcing a higher oil import bill that year. There was a temporary loss of exports markets and remittance earnings, which added to the woes.

The only positive aspect was that the government realized the importance of export sector in country’s overall economy. It therefore lost no time and the same year started structural reforms encompassing the industrial sector, the foreign trade and foreign investment were taken. From 1991 the country embarked on a liberalized trade regime with a short negative list on imports, removal of quantitative restrictions for all goods except consumer goods, a phased reduction in customs duties an adjustment in the exchange rate through a two-step devaluation of the rupee in July, 1991 and the movement to a market determined exchange rate. The policy towards fording portfolio investment was also substantially liberalized. Foreign investment policy was modified to eliminate barriers, alignment of taxes with international levels and transparency with fully repatriation benefits and inverter protection.

The structural reforms were aimed at integrating industrial, trade and exchange rat policies to enhance the efficiency in the economy. The beneficial effect of these measures soon reflected in a robust export and invisible growth. The post-1991 period saw a surge in capital flows resulting in growth of foreign exchange reserves.

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September 14, 2019
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