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External Sector


Macroeconomic Overview
Money and Prices
Fiscal Developments
External Sector
Issues and Priorities


External Sector

The balance of payments situation in 1997-98 remained sound. The current account deficit fell to about 1.0 per cent of GDP in 1996-97, reflecting mainly the slow-down in industrial growth and investment and growth of net invisibles. In 1997-98, the current account deficit is expected to be about 1.5 per cent of GDP, which is significantly less than the average deficit of about 2.3 per cent of GDP during the Seventh Plan period (1985-86 to 1989-90). A major factor has been the buoyancy of inflows of foreign investments, particularly direct investment.
The demand for imports has been subdued over the last two years, reflecting moderation in industrial activity. Non-oil imports based on DGCI&S data (in US dollar terms), declined by 0.2 per cent in 1996-97, after an increase of about 29 per cent per year in the previous two years. During 1997-98, such imports recovered to grow by about 14.5 per cent (provisional).
Based on DGCI&S data, export growth, in US dollar terms, decelerated to 5.3 per cent in 1996-97 and to 2.6 per cent (provisional) in 1997-98, after three successive years of increase ranging from 18 to 21 per cent per annum.
The slowdown in export performance reflects a range of factors of foreign and domestic origins. The two most important factors were probably the sharp decline in the growth of the value (US$) of world trade in 1996 and 1997, and the real appreciation of the rupee vis-…-vis the currencies of India's major trading
partners and competitors.
Other external factors included the decline in export prices of some major items of manufactured goods, and tighter requirements of quality, standards, esting and labelling in the major trading partner countries for some major items of India's exports. Other domestic factors are the slow down in growth of power, tighter supply conditions in the domestic market for agricultural items especially rice and wheat, tightening of domestic environmental regulations, and infrastructure bottlenecks.
As a measure of import decontrol, four hundred and eighty eight items were moved from the restricted list to the OGL between April 1, 1996 and April 1,1997. An additional 128 items, mainly textiles, were freed during 1997-98, and another 340 items were shifted from the Restricted List to the OGL in April 1998.
The capital account of balance of payments exhibited a handsome surplus in 1996-97, following sustained buoyancy in foreign investment flows and a surge in net inflow of non-resident deposits. Net capital inflows in 1997-98, are estimated to be at about the 1996-97 level. Total foreign investment rose to US $6.0 billion in 1996-97 from US $4.9 billion in 1995-96. During 1997-98, total foreign investment amounted to US $4.8 billion. Of particular interest is Foreign Direct Investment (FDI). Inflow of FDI in 1996-97 increased by about 26 per cent to US $2.7 billion. During 1997-98, FDI amounted to US $3.2 billion, an increase of 18.6 per cent over the corresponding period in 1996-97.
The surpluses in the capital account of balance of payment in 1996-97 and 1997-98 exceeded the deficits in the current account by a large margin, resulting in sizeable accretions to foreign currency assets of the Reserve Bank. The foreign currency assets increased by US $5.3 billion in 1996-97 and by US $3.6 billion in 1997-98 to attain US $26.0 billion at the end of March 1998. Total foreign exchange reserves (including gold and SDRs) at the end of March 1998 amounted to US $29.4 billion.
The exchange rate of the rupee displayed reasonable stability during the year 1996-97. The stability in the exchange rate of the rupee was disturbed in the last week of August 1997, when the currency experienced a mild contagion effect of currency turmoil in Southeast Asia. Beginning in the second week of November 1997, the exchange rate of the rupee against the US dollar came under renewed downward pressure. The recent market movement in the rupee-dollar rate, however, corrects a part of the appreciation in real effective exchange rate, which has occurred over the last two years.
India's external debt increased marginally by US $0.7 billion from US $92.2 billion at the end of 1996-97 to US $92.9 billion at the end of September, 1997. As a per cent of GDP, external debt declined to about 24 per cent at end September 1997 from about 26 per cent in 1996-97. Debt service payments declined from 24.3 per cent of current receipts in 1995-96 to 21.4 per cent in 1996-97, despite the bunching of repayments of India Development Bonds. In 1997-98, the ratio is expected to decline to about 18 per cent.
The incidence of poverty has continued to decline during the 1990s. The poverty ratio for rural and urban areas combined, for the country as a whole declined by 2.9 percentage points in 1993-94 over 1987-88 (Planning Commission estimate). The incidence of poverty has declined considerably over two decades from 56.4 per cent in 1973-74 to 37.3 per cent in 1993-94 in rural sector and from 49 per cent to 32.4 per cent in urban sector. Overall, the all India poverty ratio declined from 55 per cent to 36 per cent over the period 1973-93. Rapid growth in subsequent years should have further reduced the poverty ratio.
Average real wages for unskilled agricultural labour that reflect the economic condition of agricultural labourers declined by 6.2 per cent in the crisis year of 1991-92 (Agricultural year July to June) for the country as a whole. But in the subsequent years they have increased each year except in 1994-95 when there was marginal fall of 0.4 per cent.
The Central Plan and non-Plan expenditure on social sectors including Rural Development and Basic Minimum services recovered to an average of 1.7 per cent of GDP during 1995-96 to 1997-98 (RE). This compares with an average of 1.5 per cent of GDP during 1992-93 to 1994-95. The Central Plan allocations on major schemes for social sectors and programmes grew by about 13 per cent in 1997-98 (RE) over 1996-97 (RE). The outlay for education has gone up by about 30 per cent in 1997-98 (RE) over 1996-97 (RE). A new scheme "Balika Samridhi ojana" (BSY) to provide college and technical education to girls has been launched on the October 2, 1997.

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