Resilience in addition to strength, Microeconomics

Resilience in Addition to Strength:

The BOP has been in overall surplus since 1996-97 with forex reserves rising, on an average, by $8.50 billion per annum during 1996-97 to 2004-05. The current account also turned into surplus during 2001-02 after a gap of 24 years (current account surplus was last recorded in 1977-78). During 2002-04, BOP on current account remained in surplus. CAS could be attributed to the following factors: 

•  Buoyancy in private transfers. 

•  Fast expansion in software exports. 

CAS, accompanied by accelerated net capital inflows resulted in a huge increase in forex reserves. This also facilitated the Government's decision in early-2003 to effect repayment of foreign loan of $1.54 billion due to IBRD and another loan of $1.25 billion to the ADB. However, current account surplus may be temporary feature for the economy. A sustainable current account surplus must be based on reasonable export and import growth, consistent with the rising development needs and export competitiveness of Indian products abroad.  

The role of capital account has also undergone a change. Till recent time, the role of capital account was limited to financing the current account deficit, thus, effectively acting as a mirror image of the current account. However, with the changing composition and dimensions of capital flows, the focus is rapidly shifting towards individual constituents in the capital account. For instance, in recent years, the capital account has been dominated by flows in the form of foreign direct investments and portfolio investments.  

Posted Date: 11/15/2012 12:30:27 AM | Location : United States







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