As shown in Table 6, India's balance of payments has improved considerably since
the crisis at the beginning of this decade, when the current account deficit had risen to an
unsustainable level of nearly $10 billion (3.2 per cent of GDP) in 1990-91 and foreign
currency reserves had fallen to barely two weeks worth of imports at one point in 1991.
Highlights of improvements in the external payment situation include:
Recovery of export growth from minus 1.1 per cent, in dollar terms, in 1991-
92 to a positive growth in the range of 18 to 20 per cent in each of the last three
financial years;
Rise in the ratio of exports to imports to the range of 85 to 90 per cent in recent
years as compared to only 60 per cent in the latter half of the 1980s;
Significant decline in the current account deficit from over 3 per cent of GDP
in 1990-91 to much more manageable levels since then;
Rapid growth in annual foreign investment flows from less then $100 million
in 1990-91 to the range of $4 to $5 billion in the last 3 years (1993-94, 1994-95
and 1995-96); and
Recovery of foreign currency reserves from around $1 billion at one point in
1991 to over $20 billion by end March 1995, though followed by a decline to
$17 billion by end March 1996. By July 12, 1996 reserves had risen to $17.7
billion.
Although export growth remained strong at 21 per cent, in dollar terms, in 1995-96,
the balance of payments came under some pressure because of the continuing surge in
import growth, higher debt service on external liabilities incurred in earlier years and a
decline in net portfolio investments in the form of GDR issues. Non-oil imports
(DGCI&S) increased by 30 per cent for the second year in a row, reflecting the strong
boom in the industrial sector since 1994-95. In 1995-96 imports of capital goods
increased by over 30 per cent and imports of raw materials and components grew by
almost 30 per cent, accounting for most of the import growth.
The continued high growth of imports in 1995-96 led to a widening of trade and
current account deficits and, together with developments on the capital account, resulted
in use of foreign currency reserves of nearly $3 billion. (Over the year reserves declined
by $3.8 billion after accounting for valuation changes). Furthermore, the pressure on the
balance of payments was also manifested in the market determined exchange rate, with
the nominal rupee dollar exchange rate depreciating from a monthly average of Rs.31.4
per dollar in July 1995 to Rs.34.4 per dollar in March 1996. There were pronounced
bouts of volatility in the foreign exchange market in September-October 1995 and again
in January-February 1996. However, following the announcement of corrective measures
by the Reserve Bank of India, the foreign exchange market stabilized at around Rs.35 per
dollar up to the end of June 1996. It may be noted that with the rupee-dollar exchange
rate ruling at around Rs.35.5 per dollar in the second week of July 1996 the rupee still
remained appreciated in real effective exchange rate terms (with respect to India's major
trading partners and after allowing for higher rates of inflation in India) by about 5 per
cent as compared to March 1993 and by about 1 per cent as compared to the average for
1993-94.
During the first two months of 1996-97, the DGCI&S data on foreign trade indicate
a significant slowing in the growth of both exports and imports. Export growth has
slowed to 14.4 per cent, in dollar terms, over the first two months of 1995-96. Import
growth has slowed to 23.4 per cent, with non-oil import growth slowing sharply to only
17.2 per cent and oil import growth rising dramatically to nearly 48 per cent in dollar
terms. Even allowing for some special short term factors and bunching of oil import
payments, it is quite clear that such high growth of the oil import bill could easily place
unsustainable pressure on the balance of payments. Recent adjustments in petroleum
product prices should help relieve some pressure.
To ease Indian industry's access to external funds the Government issued the
guidelines for external commercial borrowing in June 1996 by permitting preferential
access to development finance institutions, infrastructure sectors and exporters. These
measures complement the liberalization of guidelines for Euro issues noted earlier. In
addition, the policy stance towards foreign direct investment has also been clarified and
strengthened with the restructuring of the Foreign Investment Promotion Board and the
decision to establish a Foreign Investment Promotion Council.
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Published by The Government of India, Ministry of Finance,
Economic
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