Explaining balance of payments, Macroeconomics

Explaining balance of payments:

First, with the second oil shock of  1979-80 and  doubling of  India's  import bill along with  dismal  export performance as result of severe world- wide recession resulted into current account  deficit of 1.8  percent of GDP, and adjustment was made possible  through IMF Extended Fund  Facility with  a massive  loan of  $5.7 billion  in  1981.

Second, strains on BOP again resurfaced during1 985-90. Rising exports but much faster increasing imports and declining support from invisible receipts (due to growing interest payments and outgo on account of profits, dividends, royalties and technical fees) caused the current account deficit to reach 24 percent of GDP during this period. Third, domestic fiscal deficit rose from an annual average of 6.3 percent in 1980-84 to 8.2 percent of GDP in 1985-90.

While external assistance, commercial borrowings  and NRI deposits did finance  the 'twin deficits' yet it was at a high cost of doubling India's  external debt  and  rising debt  service ratio  i.e.,  from 13.6 percent in 1984-85 to  30 percent of export earnings in 1989-90. Fourth, superimposed on 1980s 'twin deficits' was the Gulf crisis of 1990 which marked a massive rise in oil price, decline in workers'  remittances  and  additional cost  of  repatriation  of expatriates, thus causing the current account deficit to reach $9.7 billion in 1990-91, a higher figure of $2.8 billion from the previous year. Fifth, financing of this deficit was an uphill task as foreign currency assets had  reached a very low point; recourse to commercial borrowings dried up thanks to India's downgrading by  credit rating agencies; outflow of NRIs  deposits remained unabated and short term credit was denied rollover by lenders. The only option left was to seek IMF assistance and avoid debt default. Sixth, potent reasons for economic policy changes were not related only to the immediate and unprecedented crisis but also to growing realization that our development strategy since 1950 and concomitant regulatory frame had failed miserably.

Seventh, earlier liberalization attempts touched irritants like control, licensing and regulatory regimes t the margin unlike all pervasive economic reforms witnessed in post-1991 period. These reforms were conceived as a package of mutually supporting and consistent elements and called for coordinated action in several areas.

Posted Date: 11/9/2012 4:45:44 AM | Location : United States

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