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Here is a compilation of essays on ‘Balance of Payments (BOP)’ for class 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Balance of Payments in India’ especially written for school and college students.
Essay on the Balance of Payments (BOP) in India
Essay Contents:
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- Essay on the Meaning of Balance of Payments
- Essay on the Balance of Payments Position in India
- Essay on Factors Responsible for Balance of Payments
- Essay on the Problems of Deficits in Balance of Payments
- Essay on the Balance of Payments Position and New Economic Reforms of 1991
Essay # 1. Meaning of Balance of Payments (BOP):
The exports and imports of a country should be roughly equal in value, since the foreign exchange earned by exports is necessary to finance imports, but such a balance is rarely achieved. This is partly because trade passes through the hands of many different companies working independently, and thus an exact balance can never be reached, but is also due to fluctuations in markets leading to changes in import and export values over a period of years.
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The difference in value between imports and exports is referred to as the balance of trade. If exports exceed imports a country is said to have a favourable balance of trade, while if imports exceed exports it has an adverse balance of trade. These terms are relics of an earlier trading era, when if a country exported goods in large quantities they were paid for in gold.
Thus an excess of exports brought an addition to gold reserves. Modern economists no longer consider this to be a particularly desirable state of affairs and thus the use of the words is rather confusing today. In fact a country which has a consistent adverse balance of trade, as Britain has done for more than a century, can enjoy great prosperity, while a favourable balance of trade is often characteristic of underdeveloped countries today, which often have great financial difficulties notwithstanding.
The reason for this apparent contradiction is that the balance of trade only takes account of visible trade or the value of actual goods transferred from one country to another. But there are many other ways in which foreign exchange can be earned or spent.
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These are collectively called invisible trade which accounts for a quarter of all trade. When invisible trade is taken into account a balance of all transactions with foreign countries can be worked out. This is called the balance of payments.
Essay # 2. Balance of Payments Position in India:
The balance of payments position of the country reflects on its economic health. The balance of payments of any country is a comprehensive and systematic accounts of all the different transactions occurred between the residents of a country and the rest of the world during a particular period of time.
The balance of payments maintains detailed classified records of different types of receipts against exports of goods, services and all the capital received by its residents on the one hand and also of all the payments made by the residents against imports of goods and services received along with the capital transferred to non-residents and foreigners, on the other hand.
Thus the balance of payments is much wider than the balance of trade which refers to only merchandise exports and imports.
The balance of payments is broadly classified into:
(a) Current account and
(b) Capital account.
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The current account includes: visible exports and import; invisible items relating to receipts and payments for various services like banking, insurance, shipping, travel etc. and other unilateral transfer of payments like donations, grants, taxes etc.
The capital accounts of balance of payments include all the current economic transaction for the country’s international financial position resulting changes in the foreign financial assets and liabilities. The capital transaction includes both private, banking and official transactions.
The balance of payment account is maintained on the basis of double entry system of book keeping. If a country faces deficits in the current account of its balance of payment then such deficit is normally met either by liquidating its assets or through borrowing from abroad. Thus a persistent deficit in the balance of payments of a country results in a heavy debt burden on the economy.
The Balance of Payments Position of India on Current Account since Independence:
With the introduction of planning in India, the balance of payments position of the country has been recording considerable changes with the continuous changes in its imports and exports.
BOP Position during the First Four Plans:
The balance of payments position during the First Plan period was quite satisfactory as the country experienced a deficit in its current account only to the extent of Rs 42.3 crore. In this period, the inflow of foreign capital was only Rs 13.6 crore and the foreign exchange reserve was about Rs 127 crore.
During the Second Plan, the deficit in the balance of trade was to the tune of Rs 2,339 crore and the surplus of invisibles and donations ultimately reduced the deficit in balance of payment to Rs 1,725 crore. This higher deficit in the balance of payment, during the Second Plan was resulted from heavy imports of capital goods, huge imports of food grains and raw materials and lesser expansion of exports and higher maintenance imports.
During the Third Plan the country experienced a current account deficit in its BOP to the extent of Rs 1,941 crore which was financed by loans from foreign countries under various schemes. During the Fourth Plan, the Government introduced both export promotion and import substitution measures for wiping out the deficits in the BOP.
Moreover, due to sudden increase in the invisibles accounts receipts to the extent of Rs 1680 crore in 1973-74, the plan ended with a surplus of Rs 100 crore in its BOP.
BOP during the Fifth Plan:
During the Fifth Plan period, due to the applicability of two factors like hike in oil prices arid increase in the value of exports due to promotional measure$, although a surplus in trade balance was attained in 1976-77 (Rs 316 crore) but the plan experienced an increasing trend in trade deficit to the extent of Rs 3,179 crore. But due to higher entry of net invisibles, the Fifth Plan ended with surplus of Rs 3,082 crore.
BOP during the Sixth to Twelfth Plan:
The balance of payments position recorded a total change since 1979- 80. India started to record a heavy deficit in its balance of payments since 1979-80. Table 15.6 shows the growing deficit in trade balance along with the growing deficit in its balance of payments position during the Sixth to Twelfth Plan.
Thus Table 15.6 reveals that due to the mounting deficit in trade balance, i.e., from Rs 5,967 crore in 1980- 81 to Rs 6,721 crore in 1984-85, India maintained a huge deficit in its balance of payments to the extent of Rs 11,384 crore during the Sixth Plan period.
Again due to a persistent growing deficit in trade balance the cumulative deficits in the balance of payment during the Seventh Plan rose further to Rs 38,313 crores, showing the annual average deficit of Rs 7,662 crore.
Again in 1990-91, total amount of deficits in the balance of payments was as high as Rs 17,369 crore. But in 1999-00 and 2000-2001, the total amount of deficits in the balance of payments was Rs 20,331 crore and Rs 11,431 crore respectively. In 2001-02, total surplus in BOP was Rs 16,426 crore and the total surplus further increased to Rs 47,952 crore in 2003-04.
In 2013-14, total current account deficit (CAD) in BOP was Rs (-) 1,87,750 crore.
This huge deficit in the balance of payments position during the entire Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Plan periods was the result of tremendous rate of growth of imports accompanied by a poor rate of growth of exports. The trade deficits during these four plans were so heavy that it could not be offset by the flow of funds under net invisibles.
Table 15.7 depicts a clear picture about the amount of deficits in the balance of payments from the First Plan to the Ninth Plan.
Recent Increase in Current Account Deficit (CAD) in Balance of Payments since 2011-12 and its Changing Position:
India has been experiencing increase in current account deficit (CAD) in balance of payments especially since 2011-12. With net exports declining, India’s balance of payments (BoP) has come under pressure. The performance of balance of payments shows that in the first half (April to September) of 2011-12, the CAD which stands at US $ 36.4 billion increased to US $ 39.0 billion in the first half of 2012-13.
Thus the CAD as per cent of GDP which was 4.0 per cent in the first half 2011-12 gradually increased to 4.6 per cent of GDP in the first half of 2012-13.
As per the data released by the Reserve Bank, the CAD, which is the difference between inflow and outflow of foreign currency, widened from 5.4 per cent of GDP in Q2 (July-September) of 2012-13 to a record high of 6.7 per cent of GDP in Q3, which is mainly driven by large trade deficit.
However, the CAD is likely to come down in the fourth quarter (Q4) of 2012-13, on the back of improvement in exports in the last few months. As a result, the current account deficit is estimated at around 5.0 per cent of GDP in 2012-13, which is just twice the comfort level.
Thus India’s current account deficit, the difference between inflow and outflow of foreign funds, which had climbed to the record high of 6.7 per cent of the GDP in the mid-quarter of 2012-13 gradually climbed down thereafter and shown some improvement on account of likely upturn in exports as a result of announcement of various government measures.
Accordingly, the current account deficit (CAD) stood at $ 88.2 billion or 4.8 per cent of GDP in 2012-13 as compared to $ 78.2 billion or 4.2 per cent of GDP in 2011-12. Thus the government proposes to bring it down to US $ 70 billion or 3.8 per cent of GDP in 2013-14. But the trade deficit, coupled with a slow recovery in net invisibles (income and services) led to widening by CAD to US $ 21.8 billion in quarter 1 of 2013-14.
CAD had declined to 3.6 per cent in the January-March quarter of 2013-14.
Thus, the RBI data shows that the CAD which stood at 82.0 billion or 6.5 per cent of GDP in October-December quarter of 2012-13 has narrowed down to $ 31.0 billion or 1.7 per cent of GDP in 2013- 14. Accordingly, the Finance Ministry Observed that the CAD came down to US dollar 32 billion in 2013-14 from an all time high of US $ 88.2 billion in 2012-13.
Thus, the trade deficit reduction which was a major component of CAD in its recession was largely due to weaker currency, softer domestic demand and curls on gold imports. Apart from this, the tightening measures of the RBI and the steps taken to attract deposits and other inflow of funds helped to restore confidence among the investors in respect of revival of growth.
The main reason for large current account deficit is the higher quantum of trade deficit as exports contracted over 4 per cent to US $ 266 billion during April-February 2012-13, while imports were up by 0.3 per cent at US $ 448 billion. Higher volume of gold import and crude oil import along with slow-down in exports are the main reasons, behind this higher current account deficit faced by the country in recent years.
In order to reduce CAD, the government has taken steps to woo foreign institutional investors (FIIs) and the response in this regard is highly appreciable. In recent days, several global funds and equity investors have started making a beeline for investing in India’s highway sector, a move that will likely to free up thousands of crores of rupees for Indian developers—the funds that were parked idly so long in the absence of government decision favourable to such investment.
Overseas investors have pumped in more than Rs 1,400 crore ($ 254 million) in the first week of March (2012-13) itself. Moreover, with the rising exports in recent months (February-April, 2013) we may infer that the CAD would be falling down to a comfortable level.
Thus the improvement in exports is quite encouraging the modest recovery in exports in the last quarter (Q4) of 2012-13 augers will for CAD, which has emerged as a tough policy challenge for the government and crossed 6.7 per cent in the third quarter (Q3) of 2012-13.
Barclays report observed that India’s CAD is likely to witness a gradual improvement in the, next two to three years and it is expected to come down to 3.9 per cent of the GDP in 2013-14. India’s current account balance has weakened significantly since 2010-11 but an improvement is expected within next two-three years at a gradual pace.
As per Barclays report, India’s CAD reached a record 4.9 per cent of GDP in 2012-13 (about US $ 90 billion) and on a conservative basis, it is likely to improve to 3.9 per cent of GDP (about US $ 9. billion) in 2013-14.
Thus, the Indian Economy had to face the external shocks which got amplified on account of confluence of weak external demand and relatively strong domestic demand with large dependence on crude oil imports whose price levels remained elevated until the second-half of the current fiscal. These shocks led to widening of the CAD in 2011-1-2 which continued through the first quarter of 2013-14.
With external financial sources remaining volatile, the less than adequate quantity and deteriorating quality of financing resulted in a sharp depreciation of the rupee. The policy responses that were put in place in 2013-14 helped the country to overcome the stress through reduction in the level of CAD and this, along with ample financial, led to reserve accretion that helped build residence—a process that continues through the current fiscal (2014-15).
In the first-half of 2014-15, India’s external-sector position was benign and comfortable.
Two important developments that took place were that:
(i) Lower trade deficit along with moderate growth in invisibles resulted in lower CAD and
(ii) There was a surge in capital inflows, enabled by higher portfolio investment, foreign direct investment (FDI) and external commercial borrowings (ECB).
Higher capital inflows were in excess of the financial requirement or CAD and thereby resulted in accretion in foreign exchange reserves. Given the above developments and considering the current conjuncture opportune, the Government decontrolled the prices of high speed diesel on 19th October, 2014 and lifted the restrictions placed on gold imports on 29th November 2014.
The balance of payments (BoP) data indicates that in the first-half of 2014-15, there was a year-on-year improvement in trade account (on BoP basis) as a result of low growth in imports overcoming the moderation in merchandise export growth. As a result of the above developments, CAD was placed at US $ 17.9 billion in 2014-15 (April-September) as compared to US $ 26.9 billion in the same period of 2013-14.
As a proportion of GDP, the CAD in India declined from 3.1 per cent in the first half of 2013-14 to 1.9 per cent in the first half of 2014-15.
Essay # 3. Factors Responsible for Balance of Payments (BOP):
Till the Fourth Plan the balance of payments position of the country was within the manageable limit. But from Fifth Plan onwards, the balance of payments crisis of the country started to deteriorate at a quicker pace. Particularly during the Seventh Plan the balance of payment crisis reached to such an extent that it became totally unmanageable.
Following factors are mostly responsible for this growing crisis in the balance of payments:
1. The first important factor responsible for this growing crisis in BOP was the policy of import liberalisation introduced by the Congress (I) Government headed by Late Rajiv Gandhi resulting in a huge inflow of imports particularly after the announcement of Exim Policy in 1985.
2. The second factor responsible for the crisis was the existing heavy import base of the country. In-spite of attaining an encouraging 18.7 per cent annual growth rate of exports during Seventh Plan, which was even higher than the annual growth rate of imports (16.8 per cent), the BOP position deteriorate to a serious point as the country started with larger volume imports.
3. The third factor responsible for this BOP crisis is the higher import intensity in the industrial development resulting from import intensive industrialisation process followed in the country for meeting the requirements of elitist consumption (viz.; colour TVs, VCRs, refrigerators, motor cycles, cars) etc.
5. The worsening of the current account deficit in BOP in 1990-91 and thereafter was partly on account of Gulf war and Iran crisis in 2011-12 and the higher price of POL imports and higher volume of POL imports continuously.
6. The aggravation in trade deficit in recent years was also resulted from a deterioration in the invisibles account because of lower remittances and higher interest payments.
7. The current account deficit in 1990-91, 2012-13 and thereafter weakened the ability to finance deficit massively. Political uncertainty at home, coupled with rising inflation and widening fiscal deficits, led to a loss of international confidence. This had resulted drying up of commercial borrowing and an outflow of NRI deposits.
8. Although there was a severe import compression during 1991-92 but the export performance in 1991-92 was disappointing with a marginal fall in exports in dollar terms reflecting depressed conditions in world markets and a virtual collapse in exports to the former Soviet Union.
Thus in-spite of serious attempts, the trade deficit declined marginally by $ 4.7 billion compared with the previous year. However, the foreign exchange reserves of the country at the same time increased by $ 3.57 billion. But the growing trade deficit still remains a point of concern in recent years.
9. The current global economic slowdown is mostly responsible for growing trade deficit and unfavorable balance of payments situation arising out of reduction in exports.
10. The main factors responsible for higher current account deficit (CAD) in India’s balance of payments account during 2011-12 and 2012-13 are higher volume of gold imports and crude oil imports, surges in commodity prices along with slow-down in exports.
Essay # 4. Problems of Deficits in Balance of Payments:
The growing and persistent deficits in the balance of payments cannot be solved by the use of accumulated foreign exchange reserves or through borrowing from the IMF or by the inflow of resources through external loans and grants.
The basic factors responsible for this persistent balance of payments crisis must be dealt with seriously. Otherwise, the country will reach a situation like Argentina and Mexico and will lose its creditworthiness in the international market.
Thus under such a situation the ultimate solution lies in containing the import bill through severe compression on the one hand and to promote export to the maximum extent on the other. Prof. Sukhamoy Chakraborty in this connection observed, “In my judgement, India’s balance of payments is likely to come under pressure unless we carry out a policy of import substitution in certain crucial sectors. These sectors include energy, edible oil and nitrogenous fertilizers.”
i. Import Control:
Under the present circumstances, the country should reduce its dependence on those commodities in which it has its productive capacities. Accordingly, the country should try to increase the production of food-grains, edible oils and completely stop its import of these commodities.
The country should increase the production of iron and steel, paper, fertilizers etc. by a higher degree of capacity utilisation of these existing industrial units and thus reduce its imports. The country should also put a check on the ever increasing import of POL through both increased domestic production and curtailment of its wasteful and unlimited consumption.
Moreover, there should be a severe curb on the imports of luxuries. Besides, the country should try to adopt import substitution measures progressively and also discourage indiscriminate grant of licenses of foreign collaborations.
ii. Export Promotion:
In order to tackle the balance of payments crisis more effectively, the country should try to promote exports of non-traditional items like engineering goods, processed foods (fish and meat preparation), fruits and handicrafts etc. Moreover, the country should try to diversify its export markets into some non-traditional areas and should derive sufficient export surplus by containing home consumption of those commodities.
In the mean time, the year 1991-92 closed with important changes in trade and exchange rate policies announced in the Budget for 1992-93. Due to considerable import compression on measures the total value of imports declined from $ 24072 in 1990-91 to $ 19411. Moreover, there was a shift to a new system of exchange rate management after the introduction of the system of full convertibility of rupee and market exchange rate in 1993-94 and 1994-95 Budget.
Again in order to eliminate the cumbersome system of import licensing characterised by bureaucratic delay and arbitrariness, the system of liberalisation of import licensing and tariff reductions were introduced. This would promote greater competitiveness of Indian industry and helped the country to promote exports in the long run. Thus care must be taken so that the fruits of import liberalisation remain restricted to export oriented and import substitutions industries. Considering the growing balance of payment crisis in the country, timely action must be taken so as to overcome the impending crisis.
These timely actions should be taken in the following manner:
(i) Careful screening of imports as essential and non-essential and then strictly curtail the non-essential imports;
(h) Intensifying drive towards export promotion seriously and also to diversify the exports of the country;
(iii) Encouraging implementation of measures towards import substitution and to attain self reliance, and
(iv) To discourage indiscriminate grant of licences to foreign collaborations excluding the areas of adopting sophisticated technology.
However, the balance of payments position in India is not at all satisfactory and such unsatisfactory performance is mostly resulted from huge trade deficit arising out of persistently rising imports and slowly rising exports. Thus the ultimate solution to such critical problem rests on promotion of exports and restriction of imports to the unavoidable minimum simultaneously.
Essay # 5. Balance of Payments Position and New Economic Reforms of 1991:
Second phase of economic reforms since 1991 and the export promotion strategy have created considerable impact on the balance of payments position of the country. Accordingly serious efforts were undertaken to raise the export-import cover. Side-by-side, imports were liberalised to bring technological upgradation.
Moreover, non-debt creating inflows of capital like foreign direct investment as well as portfolio investment were encouraged so as to replace debt-creating capital. Table 15.8 reveals that the balance of payments position of the country has been experiencing some remarkable changes in the post-reform scenario as the coverage of imports by export earnings has increased considerably from 51.8 per cent in 1980-81 to 86.7 per cent in 1991-92 and then the peak level at 90.5 per cent in 1993-94 and then finally to 88.2 per cent in 1996-97.
In this connection, the Economic Survey, 1994- 95 rightly observed, “The recent developments in India’s external sector reflect a shift from a foreign exchange constrained control regime to a more open, market driven and liberalised economy. This has been facilitated by the structural change in the country’s balance of payments which has occurred during the last few years. The most notable feature of this change has been the sharp increase in the coverage of imports by export earnings.”
Again the Economic Survey, 1995-96 observed, The development in India’s trade and payments over the past five year’s mark a noticeable structural change towards a more stable and sustainable balance of payments. During the post-liberalisation period, there has been a sharp improvement in the coverage of import payments through export earnings.
The coverage ratio has averaged around 88 per cent since 1992-93, compared with only 52.4 per cent at the beginning of the 1980s and about 70 per cent at the end of 1980s.
There has also been a marked improvement in the flow of invisible receipts. Together, these changes brought about a sharp reduction in the ratio of the current account deficit to GDP, from an unsustainable level of 3.2 per cent in 1990-91 to 0.8 per cent in 1994-95.(refer Table 15.8 and 15.9).
In recent years, the balance of payments position of the country experienced a mixed scenario. During 2011-12, India’s BoP was under stress as the trade and current account deficit widened. Though capital inflows increased, it fell short of fully financing current account deficit (CAD), resulting in drawdown of foreign exchange reserves.
Table 15.9 reveals that the trade deficit increased to US $ 189.8 billion (10.2 per cent of GDP) in 2011-12 as compared to US $ 127.3 billion (7.4 per cent of GDP) during 2010-11. This increase of 49.1 per cent in trade deficit in 2011-12 was primarily on account of higher increase in imports relative to exports.
Net invisibles balances showed significant improvement, registering 40.7 per cent increase from US $ 79.3 billion in 2010-11 to US $ 111.6 billion during 2011-12. Net invisible balance as per cent of GDP improved to 6.0 per cent in 2011-12 from 4.6 per cent in 2010.11. Moreover, the current account deficit widened to US $ 78.2 billion (4.2 per cent of GDP) as compared with US $ 48.1 billion (2.8 per cent of GDP) in 2010-11.
Net capital inflows were higher at US $ 67.8 billion (3.6 per cent of GDP) in 2011- 12 as compared to US $ 63.7 billion (3.7 per cent of GDP) in 2010-11, which is mainly due to higher FDI inflows and NRI deposits. As the capital account surplus fell short of financing current account deficit, there was a drawdown of reserves (on BoP basis) to the extent of US $ 12.8 billion during 2011-12 as compared to accretion of US $ 13.1 billion in 2010-11.
Widening trade deficit in 2012-13 led to sharp about of depreciation in the rupee. This essentially reflected concerns about the sustainability of the CAD in India.
Considering the situation, the Government and the RBI took a series of coordinated measures to promote exports, curb imports, particularly those of gold and non-essential goods, and enhance capital flows. Consequently, there has been significant improvement on the external front.
As a result of undertaking those measures, the country experienced a dramatic turn-around in the BoP position in the latter three quarters and for the full fiscal 2013-14. Accordingly, there was significant pick up in exports to about US $ 80 billion per quarter and moderation in imports to US $ 114 billion per quarter in the latter three quarters.
This resulted significant contraction in the trade deficit to US $ 30-33 billion per quarter in these three quarters of 2013-14. Overall, this resulted in an export performance of US $ 318.6 billions in 2013-14 as compared to US $ 306.6 billion in 2012-13; a reduction in imports to US $ 466.2 billion from US $ 502.2 billion in 2012-13; and a reduction in trade deficit to US $ 147.6 billion in 2013-14, which was lower by US $ 48 billion from 2012-13 level.
As a proportion of GDP, trade deficit on BoP basis was 7.9 per cent of GDP in 2013-14 as compared to 10.5 per cent in 2012-13.
As a result of this development in the trade and invisibles account of the BoP, the CAD moderated sharply in 2013-14 and was placed at U $ 32.4 billion as against US $ 88.2 billion in 2012-13. In a proportion of GDP, the CAD was 1.7 per cent in 2013-14 which when adjusted for exchange rate depreciation compares favourably with the levels achieved in the pre-2008 crisis years.
Thereafter, in the first half of 2014-15, the external sector position as reflected in BoP of India was benign and comfortable.
Obviously, a question arises here—whether the rise in such reserves is the result of an improvement in the current account or the consequence of excessive borrowing or external assistance by various donors, both bilateral and multilateral. The answer to this question is that such rise in foreign exchange reserves is mostly originated from excessive borrowing and large inflows of external assistance.
Although the Government has been trying to evade the problem by observing that non-debt creating assistance has been taken to meet the present crisis but there is no much on reducing the burden of foreign exchange outflows.
Because in case of non-debt creating assistance, the outflow of foreign exchange occurs in the form of royalties and dividends whereas case of debt Inflows, the outflow arises out of payment of interest and amortization payments. Both of these outflows are burdensome for the economy although apparently it does not look so.
Although the two options open to us is either larger foreign investment inflow to meet our balance of payment crisis or to reorient our trade policy for removing current account deficits in BOP, but the best option is to go for latter course. The reorientation of our trade policy suggests that the country should try to boost its exports by diversification of its composition and also of its market.
Simultaneously, pruning of imports is also very important under the present situation. Thus the non-essential imports should be curtailed and thereby the deficits in the balance of trade should also be reduced to the minimum.
Secondly, the import intensity of Indian industries has been rising at a faster rate which must be curbed at the reasonable level.
Thirdly, undue importance of artificially boosting the automobile industry, as pursued in our domestic policy, must be controlled so as to contain our POL import bill immediately which has reached the level of $ 8.22 billion in 1997-98 and is likely to touch $ 154 billion by the year 2011-12.
The country should now have a perspective plan for its industrial expansion to the required level and also an energy plan so as to contain such undue expansion of automobile industry and such other industries for the greater interest of the economy as a whole.
At present, there is a trend on the part of the Government to adopt short-term solutions, which cannot give the desired results. Instead, the Government should try to formulate as well as adopt a long term policy on fundamental issues like, nature of industrialisation, kind of investment, export-import strategy and balance of payments.
Recovery in Balance of Payments Position in India since 1991-92, i.e., after Economic Reforms:
The balance of payments position, which had reached a point of near collapse in June 1991, gradually stabilized during the course of 1991-92. In 1990-91, foreign currency reserves had declined to $ 1.1 billion despite heavy borrowing from the IMF.
In order to restore international confidence, the Government negotiated a stand-by arrangement with the IMF in October 1991 for $ 2.3 billion over a 20 month period, a Structural Adjustment Loan with the World Bank of $ 500 billion and a Hydrocarbon Sector Loan with ADB for $ 250 million.
Along with this effort, the Government also launched the India Development Bonds aimed at mobilising NRI sources of funds. With the assurance of external support through these efforts, the balance of payments position was gradually stabilized in 1991-92 and the foreign exchange reserves were restored to the level of $ 5.6 billion at the end of March 1992.
Thus, the balance of payments position in India showed a steady improvement since 1991-92 with exports covering a larger proportion of imports than in the earlier years. The export-import ratio has averaged nearly 90 per cent during 1991-92 to 1993-94 compared to an average of about 65 per cent for the preceding three years.
In 1994-95, this export-import ratio stood at 91.9 per cent. The current account deficit has also declined, averaging about 0.7 per cent of GDP for these three years (1991-94), compared to an average of about 2,6 per cent of GDP in the preceding three years. There has been a structural change in the capital account in terms of a sharp reduction in debt creating flows and an increased recourse to non-debt creating foreign investment flows.
Rise in Trade Deficit during 1995-96 and Thereafter:
India’s trade deficit during 1995-96 swelled to $ 4,538 billion—more than double of the deficit of $ 2.027 billion in the previous financial year. Thus the rise in the trade deficit during 1995-96 resulted mostly from the sudden spurt in imports, in spite of attaining a considerable higher growth in exports.
The balance of payments situation in 1995-96 reflected a renewal of economic growth with an increase in the current account deficit, as a proportion of GDP, to 1.7 per cent from 0.9 per cent in the previous, year. However, the increased deficit was easily financed by a higher level of capital inflows and a reduction of foreign exchange reserves of US $ 2.9 billion.
Developments so far in 1996-97 in the balance of payments point to an easing of pressure on the current account and to an increased buoyancy in capital inflows resulting in an increase in reserves.
1996-97:
The balance of payments position of India has been experiencing some changes in the year 1996-97 as India’s exports went up by only 4.01 per cent and imports grew by 5.99 per cent during 1996- 97 as compared to that of 21.58 per cent and 28.74 per cent recorded respectively during 1995-96.
In 1996- 97, total amount of exports has been estimated at U.S. $ 33,105.72 million and the total volume of imports has been estimated at US $ 38,547.81 million showing the trade deficit of $ 5,442.09 million in 1996-97 as compared to that of $ 4,538.99 million in 1995-96.’ Exports as per cent of imports were calculated at 88.2 per cent in 1996-97 as compared to that of 78.4 per cent in 1995-96.
2000-01. India’s balance of payments (BOP) position in 2000-01 remained comfortable and the external sector experienced a distinct improvement. Overall, the current account deficit in 2000-01 narrowed further to about 0.5 per cent of GDP from 1.1 per cent of GDP in 1999-2000.
2011- 12:
Balance of payments developments during 2011-12 witnessed slower growth of exports, higher growth of imports, invisibles and trade. As a result trade balance (defect) widened to US $ 189.76 billion. Exports recorded a growth rate of 20.91 per cent and imports recorded a growth of 30.26 per cent during 2012-13 over the previous year.
Trade deficit increased to 14.9 per cent in 2011-12 over the previous year. However, as a proportion of GDP trade deficit increased to 10.2 per cent in 2011-12 as compared to 7.4 per cent in 2010-11. The current account deficit (CAD) widened to US $ 78.15 billion in 2011-12 as compared to US $ 48.05 billion in 2010-11 but as a ratio of GDP it increased to 4.2 per cent of GDP in 2011-12 as compared to 2.7 per cent of GDP in 2010-11.
Net capital flows were higher at US $ 67.8 billion (3.6 per cent of GDP) in 2011-12 as compared to US $ 63.7 billion (3.7 per cent of GDP) in 2010-11, which was mainly due to higher FDI inflows and NRI deposits. There was a drawdown from foreign exchange reserves amounting to US $ 12.8 billion for financing current account deficit in 2011-12 as against accretion of US $ 13.1 billion in 2010-11.
2012- 13:
The balance of payments position during 2012-13 again witnessed slower growth of exports, higher growth of imports, invisibles trade. As a result, trade balance (deficit) widened to US $ 195 billion in 2012-13 as compared to US $ 189 billion in 2011-12.
The current account deficit (CAD) widened to US $ 88.16 billion in 2012-13 as compared to US $ 78.15 billion in 2011-12 but as a ratio of GDP, it increased to 4.8 per cent of GDP in 2012-13 as compared to 4.2 per cent of GDP in 2011-12.
2013- 14:
Balance of payments position of India in 2013-14 has shown some improvement as a result of increase in exports, fall in imports and fall in trade deficit. As a result, trade balance (deficit) contracted to US $ 147 billion in 2013-14 as compared to US $ 195 billion in 2012-13. The current account deficit (CAD) reduced to US $ 32.39 billion in 2013-14 as compared to US $ 88.16 billion in 2012-13.
As a ratio of GDP, the CAD declined to 1.7 per cent in 2013-14 as compared to 4.8 per cent of GDP in 2012-13.
Thus the balance of payments condition of the country has shown some improvement in 2013-14. Moreover, the policy responses that were put in place in 2013-14 helped to overcome the stress through reduction in the level of CAD, and this, along with ample financing, led to reserve accretion that helped in building resilience—a process that continues through the current fiscal i.e., 2014-15.