Q.1: Explain the emerging trends in India’s BOP position since 1991. OR
Examine the structure of BOP in India since 1991. OR
Examine the changes in current account and capital account balance of
India’s BOP since 1991.
Ans. A) INDIA’S BOP SINCE 1991:-
The Balance of Payments of a country is a systematic record of all transactions between the residents of a country and the rest of the world carried out in a specific period of time.
In 1990-91 India was facing BOP crisis. India faced huge trade deficit of 9.4 US $ billion and the net invisibles were also negative. This was mainly due to rise in imports of petroleum products. BOP situation improved since 1993-94. In 2009-10, BOP position showed increase in foreign exchange reserves of over 9.5 US $ Billion.
Note :- Reserves (+ Sign) indicates use of reserves.
Reserves (- Sign) indicates reserves have increased.
Let us Explain :-
1) Trade Balance :-
Trade balance is a difference between export earnings and import payments. In India, trade deficit is mostly negative. In 1990-91, trade deficit was over 9 US $ billion which increased to over 118.4 US $ billion in 2009-10. There was negative growth in exports, due to recession in world markets on account of sub-prime crisis of USA.
2) Invisibles (net) :-
The net invisibles include the difference between receipts and payments on account of Non-factor services (insurance, transport, travel etc.), Income (Interest, profit, dividend), private transfers and official transfers. In 1990-91, the net invisibles were negative to the extent of about 0.3 US $ billion. In 2009-10, the net invisibles were positive to the extent of over 80 US $ billion.
3) Current Account Balance :-
It is the difference between the receipts and payments on current account which includes trade balance. In India the current account balance is mostly negative due to huge trade deficit. In 1990-91, the current account deficit was 9.7 US $ billion, which increased to 38.4 US $ billion in 2009-10.
4) Capital Account Balance :-
It is the difference between the receipts and payments on capital account. In India, the capital account always showed a surplus mainly due to inflow of foreign investments in India and net borrowings. In 1990-91, the capital account showed a surplus of 8.4 US $ billion, which increased to about 52 US $ billion in 2009-10.
5) Foreign Exchange Reserves :-
A negative foreign exchange reserve position shows a weak economy and a positive balance shows comfortable position of the country. In 1990-91, the foreign exchange reserves were reduced by 1.3 US $ billion. In 2009-10, the foreign exchange reserves increased by 13.4 US $ billion.
Q. 2: Explain the reasons for satisfactory performance of BOP since 1991.
Ans. A) REASONS FOR SATISFACTORY PERFORMANCE OF BOP SINCE 1991:-
The Balance of Payment situation started improving since 1991 except for the years 1995-96 and 2008-09. As on 31st March, 2009 foreign exchange reserves were 252 US $ billion. It further increased to 279 US $ billion oh 31st March 2010. The reasons for satisfactory performance of BOP are as follows :-
1) Increase In FDI In India :-
The policies of liberalisation and privatisation have been instrumental in attracting huge foreign investment. At present FDI is allowed even upto 100% in certain sectors. In 1990-91, the net FDI in India was about 0.1 US $ billion, which increased to 18.8 US $ billion in 2009-10. This has improved the net foreign investment in India.
2) Increase In Portfolio Investment
Portfolio investment includes investment by FIls in the Indian stock markets. In 1990-91, portfolio investment was nil. In 2007-08 it was 27.4 US $ billion. Again in 2008-09 portfolio investment was negative as withdrawls were more due to collapse of stock markets World wide in 2008-09. However, in 2009-10, the net portfolio investments again picked up at 32.4 billion.
3) Increase In External Commercial Borrowings
External commercial borrowings have been an important source of funds for the government. Over the years the net external commercial borrowings have increased. In 1990-91, they were about 2.2 US $ billion, which increased to 7.9 US $ billion in 2008-09, but it reduced to US $ 2.8 in 2009-10.
4) Increase In Private Transfers
Private transfers include inward remittances from Indian workers working abroad, personal gifts received from abroad, donations received from abroad by religious / charitable trusts etc. Private transfers were about 2.1 US $ billion in 1990-91. It increased to 12.8 US $ billion in 2000-01. Which further increased to 44.6 US $ billion.
5) Increase In Service Exports
At present, India ranks 9th in the world for overall services exports and 2nd in the world for computer and information services exports. In 2000-01 India’s services exports have increased from 16.3 US $ billion to 96 US $ billion in 2009-10.
The invisibles (net) on BOP account have increased over the years due to increase in services exports. In 1990-91, the net invisibles were negative to the extent of 0.3 US $ billion, which increased to 80 US $ billion in 2009-10.
The private transfers along with services exports have increased the net invisibles on BOP account.
6) Non Resident Deposits
The non-resident deposits add to the capital account of BOP. In 1990-91, non-resident deposits (net) were 1.5 US $ billion, which increased to 2.9 US $ billion in 2009-10. The various schemes of incentives announced by Indian government helped in attracting huge deposits from non-resident Indians.
Q.3 : What are the measures to be taken to maintain the BOP problem? OR
Discuss the various measures to solve the problem of balance of payment.
Ans. A. MEASURES / SOLUTION OF BALANCE OF PAYMENTS PROBLEM
Some of the important measures for maintaining / Improving balance of payments in order are as follows:-
1) Foreign Assistance
During the earlier period of planning India received substantial amounts of foreign assistance from a number of countries like USA, UK, France, Germany, and also from international institutions like IMF World Bank and IDA. Such assistance was in concessional terms. In 1991, when we faced BOP crisis India approached IMF and received substantial amount of loan. However, the role of foreign assistance in financing deficits in balance of payments has declined in recent years.
2) Foreign Investment :-
India attracts substantial amount of Foreign exchange both in form of Foreign Direct Investment (FDI) and portfolio Investment. Government has been announcing numerous concession and incentives to attract foreign investment. However Foreign investment is not an unmixed blessing. Huge payments in terms of royalty and dividends are required to be made every year in foreign exchange. Therefore, it is necessary to ensure that all investments are productively employed.
Either FDI should be directed to export industries or it should be directed in building up of infrastructure. Thus FDI can continue to serve as a reliable source of assistance in future also. Portfolio investment is made mainly on the basis of short run returns and hence they may not be treated as a reliable source.
3) External Commercial Borrowings :-
This is a high cost method of financing deficits as external commercial borrowings can generally be obtained at high rates of interest. Care must be taken to see that such loans are raised for projects which have direct impact on increasing our exports or reducing imports.
4) Non - Resident Deposits :-
Non - Resident deposits are also obtained at high rates of interest. Such deposits are highly volatile in nature as, their main objective is to maximise returns. If conditions are unfavourable, they can withdraw their funds from the country. Thus, both foreign institutional investors and non-residents are fair weather friends. We cannot rely upon them at times of crisis.
5) Earnings From Invisibles :-
Earnings from invisibles have played an important role in reducing the current account deficit in balance of payments all through 1990’s. It v covered the entire trade deficit in the year 2001-02. The prospects of invisibles in future looks bright for India.
6) Merchandise Trade :-
The lasting solution to BOP problem lies in our policy to promote exports. All possible efforts should be taken to increase exports. Reduction in import would be very difficult in India, under the regime of liberalised import policies. The best policy is to promote exports with the help of well formulated strategy. Thus promotion of exports must be the most important plank of our trade strategy.