Trade and development, Macroeconomics

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TRADE AND DEVELOPMENT:

In the earlier Units of this block, you have learnt about the trade policy from historical perspective and the recent shift in policy during nineties. You have also learnt about the balance of payments problems in India. In this Unit we will recapitulate the problem of  India's International Debt during seventies and eighties and then proceed to the issues of FDI, MNCs, export promotion and trade liberalisation'under WTO regime in India. As mentioned in the previous Unit, India had a problem of external payment during eighties. This was reflected in the sharply rising debt-service ratio that steadily rose from 16-18 percent in 1980-83 to 34-38 percent during the last three years of 1987-90. Apart from this, India's current account deficit (CAD) as a proportion of GDP was also increasing. It moved up sharply from an annual average of 1.3 percent during 1980-85 to 2.9 per cent in March 1989. The growing magnitude of CAD and rising CADIGDP ratio were posing the problems of financial constraints  t6 meet the BOP deficit.  

Falling foreign  exchange reserves in relation  to increasing  import requirements was of  the magnitude ofUS $15  billion over the first eight months of 1988-8.9. Evidently  the country was depleting its foreign exchange reserves to meet the  

ex  temal liabilities. From what has been documented on the trends in India's balance of payments in the previous Unit, it  is evident  that by the early  nineties the nation's current liabilities  continued  to be on the  increase, with uncertainty and unpredictability  in terms of maintaining  the on-going pattern of financing through net private transfers. A rise in the CAD/GDP ratio on the one hand, reflected the growth in current external liabilities. Reliance on net private  transfers as  the major source of non-merchandise current earnings, on  the other  raised the  question of the viability of  the current mode of  external financing. This was particularly serious  in the face of  the steady increases  in interest  liabilities. It was apparent that  the nation would be  soon compelled to accept  further reductions in the flow of real transfers as a proportion of GDP. The need had thus arisen  to find additional sources of finance in the capital market at terms which would not preclude the possibilities of securing a rise in real transfers.  


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