Let us make an in-depth study of the major reasons and remedies of balance of payments.
Reasons for Adverse Balance of Payments:
(a) The single most important item of imports throughout was food-grain, particularly in the years of drought. The value of imports of food-grains was of the order of Rs. 1,140 crores over the period 1983-86.
(b) Apart from food-grains, raw materials constitute another major item of imports. Prior to Independence, India exported raw materials. The scenario changed after the partition of the country and the launching of the five year plans. As industrialisation proceeded, the import bill on account of raw materials mounted up.
Moreover, increase in the prices of petroleum and fertilisers in the international markets in the mid-70s added fuel to the fire. However, in addition to this first oil shock, the country witnessed another oil shock in 1979 and the third oil shock came in 1990. It has been estimated that the crude oil import bill in 1990-91 come to about Rs. 4,000 crores.
(c) The deficit in the balance of payments in current account due to rising imports was partially justified. This is because capital imports have been, and are, serving the aims and purpose of industrialisation.
But, liberalised economic policies introduced by the Government since the mid-1980s have resulted in large-scale imports of modem technology. The annual rate of increase of imports in the 1980s was approximately 6% while exports increased annually by 1.4%. Thus, the trouble lies on the export front.
Deficits have been greatly caused by a large excess of imports over exports. The truth is that exports lagged much behind imports all the time.
The net earning on current account is insignificant.
The slow growth of exports is caused by:
(i) Recessionary tendencies in the world market,
(ii) Low quality of exportables,
(iii) Shortage of exportable goods,
(iv) Lack of competitive strength,
(v) Inadequate institutional arrangements,
(vi) Import-oriented exportables, and
(vii) Domestic inflation.
However, current promotional measures taken by the Government in recent years have stimulated exports to some extent.
(d) Finally, the deficit on the capital account is becoming larger and larger in recent years.
The major source of deficit on capital account has been the repayment of loans along with interest payments to various foreign governments and international financial institutions.
Remedies Adopted Against Imbalance:
(a) Raising Agricultural Production:
To reduce imports of food-grains, agricultural production had to be increased. The GOI had laid due emphasis on agriculture in almost all plans, except in the Second Plan. As a result the agricultural sector experienced Green Revolution in the early 1970s. A record output of food-grains was also achieved since then. Yet, the increase in food production was not adequate. The country had failed to build up a huge buffer stock of food-grains to tide over the drought years. Hence, there was the need to import food-grains. However, in recent years, imports of food have gone down considerably.
Efforts have also been made by the Government to increase output of agricultural raw materials required for domestic production of industrial goods as also for exports. The main objective was to achieve self-sustaining growth.
(b) Import Substitution:
The policy of import substitution has also been in operation for a long time. It refers to growing substitution of imported goods by encouraging domestic production of such goods. The adoption of this policy has enabled the country to save a considerable amount of foreign exchange.
Due to the success of this policy, the import of capital goods is, at present, much less (e.g., around 16% total imports). A large number of industrial products are now being produced domestically. Imports of non-essential items have been reduced considerably.
(c) Export Promotion:
Another important measure is export promotion.
The GOI’s measures relating to export promotion are of three categories:
(i) choosing of commodities with export potential such as engineering goods, readymade garments, chemicals and allied products, gems and jewellery, etc.,
(ii) incentives to exporters such as various types of encouragements, concessions and facilities in the form of cash subsidies, duty-free import of capital goods, raw materials, exemption from union excise duty, exemption of export income from income tax, special import licences for raw materials required for export, bank loans at low rates of interest to exporters and so on; and
(iii) organisational efforts such as creation of Export Promotion Councils for promoting exports of various goods; creation of specialised institutions for export promotion like Indian Institute of Foreign Trade, The Federation of Indian Export Organisation, The Export-Import Bank, etc., arrangements of trade fairs, trade centers, showrooms in and outside India and so on.
In addition to these, four Free Trade Zones have been set up to boost exports. Furthermore, the Government had involved itself in entering into trade agreements with different countries. These trade agreements have enabled us to export necessary items required for industrialisation of these countries. Moreover, export prospects in those countries has improved considerably. Phenomenal expansion of our export business with the erstwhile Soviet Union was the result of such bilateral trade agreements.
(d) Cost Reduction:
One of the important conditions for the expansion of exports is the reduction in production costs and, hence, prices, to make India’s products competitive in the international market. Despite the use of a package of measures to contain inflationary tendencies, inflation is continuing. As a result, India’s export products have become less competitive in the international markets.
No doubt India has adopted a number of measures to reduce imports and increase exports. But its performance has not been satisfactory. So deficits in the balance of payments continue. A number of internal and international factors have contributed largely to the emergence of huge deficits during the plan period.
Although the trade deficit in 1998-99 had reached an unprecedented level (4.2% of GDP) the GOI’s Economic Survey stated that the BOP situation was manageable. The Survey concealed the hard reality that the fundamentals of the economy were not sound and all measures of export promotion have not produced the desired effect.
The deficit was made by a large inflow from Resurgent India Bonds of the order of $ 4.2 billion during 1998-99 from NRI’s or larger inflow of FDI and external commercial borrowing. All these indicate lack of self-reliance and India’s continued dependence on external sources of funds. The truth is that the economy is inherently weak and has to be strengthened. The slow but steady depreciation of the rupee over the years proves this point.
Three suggestions may be put forward for improving India’s BOP position during the Tenth Plan:
(i) Adoption of a cautious approach in encouraging large inflows of external commercial borrowing, portfolio investment by foreigners and large contribution from NRI’s in the from of bonds.
(ii) Rising exports by at least 12% per annum.
(iii) Introducing a policy of selective import liberalisation in priority areas.