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Balance of Payments


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Budget 1998-99
Budget 1997-98
Budget 1996-97

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Balance of Payments

The East Asian crisis, which continued to deepen and spread in 1998, led to tremendous volatility and uncertainty in global financial markets, and to a re-evaluation of emerging markets as investment destinations. The increased risk aversion of international capital has had an impact on all emerging economies, including to some extent, India. In spite of a turbulent international environment, India’s balance of payments has remained moderately comfortable, with some reserve accumulation. The current account deficit widened to 1.6 per cent of GDP or U.S.$ 6.5 billion in 1997-98. In 1998-99, it is estimated to fall, as a per cent of GDP, below the level in 1997-98. Net capital inflows are expected to be lower in 1998-99 than in 1997-98 as a result of a deceleration in the inflows of foreign direct investment and commercial borrowing and outflow of portfolio investment by FIIs.
The trade deficit, on a BOP basis, increased from 3.7 per cent of GDP in 1996-97 to 3.9 per cent in 1997-98, despite the sharp deceleration in import growth. This is attributable to deceleration in export growth, which continued for the third year in succession in 1998-99. Export growth, in BOP terms, slowed from 5.6 per cent in US dollar terms in 1996-97 to 2.1 per cent in 1997-98. Performance continues to be a major source of concern in the current financial year with exports having declined by 2.9 per cent during April-December 1998, compared to a 3.3 per cent growth in the corresponding period of 1997 (DGCI&S data). This data does not include software exports which are shown under invisibles.
The weakness in export performance reflects various international and domestic factors, which include:
A decline in the growth of world trade. Import growth into the advanced economies, which are India’s major trading partners has decelerated sharply from 18.2 per cent in 1995 to 3.7 per cent in 1996 and to 2.5 per cent in 1997. 
A reduction in the export prices of major items of manufactured goods.  
An appreciation of the Rupee in real effective exchange rate terms in 1997 against the currencies of major trading partners. The movement of exchange rates during 1998, however, has largely corrected for this appreciation.
The massive depreciation of the currencies of the East Asian economies. This has impacted the price competitiveness of our exports in sectors such as man-made yarn, finished leather, and fabrics and processed minerals. Other items like textiles, automotive parts, chemicals iron ore, machinery and electronic goods have also been affected.
Domestic factors such as growing infrastructure constraints, high transaction costs, and restrictions on agricultural exports.
Total imports, on BOP basis, increased by only 4.4 per cent to US$ 51.1 billion in 1997-98 compared to 12.1 per cent growth in 1996-97, while non-oil imports, excluding gold and silver, grew by only 5 per cent in 1997-98. This marked deceleration was due to several factors, including weak domestic demand, lower industrial activity and lower unit values of imports. There has been a further deceleration of imports in the current financial year. Imports during April-December, 1998
increased by 7.1 per cent compared to 7.4 per cent in the corresponding period of 1997-98 (DGCI&S data). This is largely due to a decrease in the dollar value of POL imports by about 26.3 per cent because of continued softening of prices. The increase of 15.7 per cent in non-POL imports over the same period is mainly a result of a shift in imports of gold and silver from baggage channel to the DGCI&S channel. This follows placement of these imports under a liberal import regime in October 1997. Lower international prices of gold in 1998 have also contributed to the increase in overall demand for gold.
The slowdown in global growth and international trade has also led to the introduction of protectionist measures in some countries. These have primarily taken the form of non-tariff barriers (NTBs) like more stringent quality, testing and labelling standards and increased investigations of dumping and subsidies. This has contributed to uncertainty in foreign trade and some market disruption.
Trade policy reforms have sought to eliminate various impediments to trade and to promote export growth. The EXIM Policy 1997-2002 continues this process. In the light of the continued slowdown in exports, various measures were announced in August/September 1998 which include :
Exemption of exports under all export promotion schemes from special additional duty (SAD) of 4 per cent
Reduction in interest rates on pre-shipment and post-shipment export credit in rupees from 11 per cent to 9 per cent
Extension of the zero duty Export Promotion Capital Goods scheme to bio-technology and small scale engineering
Promotional/procedural changes like,
Extension of tax holiday for EOU/EPZ to 10 years,
Sub-contracting facility for Domestic Tariff Area (DTA),
Permission to selected manufacturer-exporters to furnish legal undertaking instead of bank-guarantee against import of duty free raw materials, simplification of bond furnishing procedure for exporters.
In order to promote trade among SAARC countries, India has unilaterally removed all quantitative restrictions on imports of around 2300 items from SAARC countries with effect from August 1, 1998. A free trade agreement was signed between India and Sri-Lanka which will reduce tariff to zero by 2007 on most commodities. This will provide an impetus to the eventual creation of a South Asia Free Trade Area (SAFTA).
The net inflow on invisible account has continued to be a major support to the balance of payments. Invisible receipts have shown robust growth, reaching US $ 23.0 billion in 1997-98. This increase has been spurred by increased private transfer receipts, which have grown by 25 per cent per annum from U.S. $ 3.9 billion in 1992-93 to U.S. $ 11.9 billion in 1997-98. Tourism receipts have risen at a rate of 6.8 per cent per annum during the five years ending 1997-98. The receipts under the miscellaneous category in the invisible account, which include software exports rose from U.S. $ 1.4 billion in 1992-93 to U.S.$ 4.0 billion in 1997-98. Software exports continue to show exceptional growth rates, and increased by nearly 60 per cent in 1997-98. The net surplus earned under invisibles, excluding the Indian Development Bonds (IDB) return flow in 1996-97, is estimated to have increased from U.S. $ 9.3 billion in 1996-97 to U.S. $ 9.8 billion in 1997-98, financing about 60 per cent of the trade deficit in the BOP in 1997-98.
The capital account in the balance of payments, which had shown an impressive surplus of U.S. $ 10.4 billion in 1997-98, is likely to be lower in 1998-99. Total net capital inflows in 1998-99 are expected to be substantially lower than the levels in 1997-98, if the exceptional inflows under Resurgent India Bonds (RIBs) are excluded. Foreign direct investment (FDI), which had increased by 18.6 per cent in 1997-98, has fallen by 38 per cent in April-December 1998. Portfolio investment has continued to decline from U.S. $ 3.3 billion in 1996-97 to U.S. $ 1.8 billion in 1997-98, to an outflow of $ 0.7 billion in April-December 1998. The significant decline in portfolio investment was partly a result of contagion from the East Asian crisis that affected all emerging markets.
The Resurgent India Bonds (RIB) scheme, launched in the current financial year, was open to both NRIs/OCBs. The scheme opened on August 5, 1998 and closed on August 24, 1998, mobilising U.S. $ 4.2 billion. Net inflows under non-resident deposits declined from U.S. $ 3.3 billion in 1996-97 to U.S. $ 1.1 billion in 1997-98. The gross disbursements under external assistance have declined slightly from U.S. $ 3.0 billion in 1996-97 to U.S. $ 2.9 billion in 1997-98. Gross disbursements during April-September 1998 was lower at US $ 830 million compared to US $ 1066 million during the corresponding period of 1997.
External Commercial Borrowing (ECB) approvals up to 23.12.98 in 1998-99 have been placed at US $ 3.8 billion compared to U.S. $ 8.7 billion in 1997-98. Disbursements have fallen even more sharply from $ 4 billion in April-September 1997-98 to US $ 1.6 billion in the first half of 1998-99. This is due to the relative unattractiveness of ECB from the perspective of borrowers. The increase in the cost of ECB funds is due to a general increase in the risk premium for emerging market borrowers, downgrading by international credit rating agencies and the rise in forward premia.
The ECB guidelines were revised in 1998-99 and include the following changes :
Proceeds of ECB can now be deployed for project related Rupee expenditure in all sectors subject to certain conditions
The limit under the "US $ 3 million scheme" has been increased to "US $ 5 million" with 3 years simple maturity. 
ECB eligibility under the scheme for exporters has been raised to three times the average export performance during the last three years subject to a maximum of US $ 100 million.
The foreign currency assets of the RBI rose from U.S. $ 22.4 billion at the end of March 1997 to U.S. $ 26.0 billion at the end of March 1998. The high surplus in the capital account in 1997-98 outweighed the current account deficit and resulted in an increase in foreign exchange reserves of U.S. $ 3.9 billion. Total foreign exchange reserves (including gold and SDRs) at the end of January 1999 amounted to U.S. $ 30.4 billion, which provides cover for about 7 months of imports in 1998-99.
After an 18-month period of stability, the exchange rate of the Rupee against the U.S. dollar came under downward pressure in August 1997, arising mainly from the East Asian crisis. At the end of January 1999, the exchange rate of the Rupee vis--vis the U.S. dollar was Rs. 42.50. The movements in the exchange rate have helped to largely correct the relative appreciation of the Rupee in real terms, which will help to offset the competitive disadvantages arising from the extensive depreciation of the East Asian currencies, and is expected to revive our exports and contain import growth.
India’s stock of external debt at end-September 1998 stood at U.S. $ 95.2 billion as against U.S. $ 93.9 billion at end-March 1998. The debt service payments, as a ratio of current receipts, continued to improve over the years declining from 30.2 per cent in 1991-92 to 19.5 per cent in 1997-98. The share of short-term debt to total debt declined from 7.2 per cent at end-March 1997 to 5.4 per cent at end-March 1998 and further to 3.7 per cent at end-September 1998. The share of concessional debt has declined from 44.7 per cent in 1996 to 39.3 per cent at end-March 1998 and further to 37.7 per cent at the end of September 1998.
 

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