Financing of the external payments deficit, Macroeconomics

Financing of the external payments deficit:

The trend  in India's widening CAD during the second half of  the eighties, both in absolute terms and also as a proportion of the GDP, increased the need for securing  an adequate flow of external finances. This was crucial to prevent the country from being forced to accept further cuts in the flow of imports from abroad. The situation  needs to be viewed in terms ofthe  prevailing state of  the country's external indebtedness and the potential of her future borrowings by the end of the eighties. The table below presents the scenario obtained in this regard.  

External finance could in principle be  availed of from multilateral official sources brimarily IMF), external commercial borrowings including supplier credit, NRI deposits on a short-term basis and, finally, by preventing herself  from further depletions,  from the  country's foreign exchange reserves. Of these, the net flows of finance from the IMF had already become negative'  by  1985-86. The other sources of external finance (including both corporate borrowings and NRIs  at  commercial  terms), began  to acquire significance only by the early nineties.

Notwithstanding the steady rise in gross authorisations of ECBs since the beginning of the eighties, net disbursements was slow to  follow during the period  1985-86 to  1988-89. In  the meantime, debt servicing on ECBs moved  up  steadily, and the  authorised ECB credit maintained an upward trend over the period. In sum therefore, the situation  by the  end  of  1980s was one in which the debt charges  (interest  and arnartisations) increased at a faster rate than gross disbursements of external loans.  

 

Posted Date: 11/9/2012 5:12:19 AM | Location : United States







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