The Indian Budget 1996-97 The Indian Economy Overview


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Balance of Payments

  1. As shown in Table 6, India's balance of payments has improved considerably since the crisis at the beginning of this decade, when the current account deficit had risen to an unsustainable level of nearly $10 billion (3.2 per cent of GDP) in 1990-91 and foreign currency reserves had fallen to barely two weeks worth of imports at one point in 1991. Highlights of improvements in the external payment situation include:

  2. Although export growth remained strong at 21 per cent, in dollar terms, in 1995-96, the balance of payments came under some pressure because of the continuing surge in import growth, higher debt service on external liabilities incurred in earlier years and a decline in net portfolio investments in the form of GDR issues. Non-oil imports (DGCI&S) increased by 30 per cent for the second year in a row, reflecting the strong boom in the industrial sector since 1994-95. In 1995-96 imports of capital goods increased by over 30 per cent and imports of raw materials and components grew by almost 30 per cent, accounting for most of the import growth.

  3. The continued high growth of imports in 1995-96 led to a widening of trade and current account deficits and, together with developments on the capital account, resulted in use of foreign currency reserves of nearly $3 billion. (Over the year reserves declined by $3.8 billion after accounting for valuation changes). Furthermore, the pressure on the balance of payments was also manifested in the market determined exchange rate, with the nominal rupee dollar exchange rate depreciating from a monthly average of Rs.31.4 per dollar in July 1995 to Rs.34.4 per dollar in March 1996. There were pronounced bouts of volatility in the foreign exchange market in September-October 1995 and again in January-February 1996. However, following the announcement of corrective measures by the Reserve Bank of India, the foreign exchange market stabilized at around Rs.35 per dollar up to the end of June 1996. It may be noted that with the rupee-dollar exchange rate ruling at around Rs.35.5 per dollar in the second week of July 1996 the rupee still remained appreciated in real effective exchange rate terms (with respect to India's major trading partners and after allowing for higher rates of inflation in India) by about 5 per cent as compared to March 1993 and by about 1 per cent as compared to the average for 1993-94.

  4. During the first two months of 1996-97, the DGCI&S data on foreign trade indicate a significant slowing in the growth of both exports and imports. Export growth has slowed to 14.4 per cent, in dollar terms, over the first two months of 1995-96. Import growth has slowed to 23.4 per cent, with non-oil import growth slowing sharply to only 17.2 per cent and oil import growth rising dramatically to nearly 48 per cent in dollar terms. Even allowing for some special short term factors and bunching of oil import payments, it is quite clear that such high growth of the oil import bill could easily place unsustainable pressure on the balance of payments. Recent adjustments in petroleum product prices should help relieve some pressure.

  5. To ease Indian industry's access to external funds the Government issued the guidelines for external commercial borrowing in June 1996 by permitting preferential access to development finance institutions, infrastructure sectors and exporters. These measures complement the liberalization of guidelines for Euro issues noted earlier. In addition, the policy stance towards foreign direct investment has also been clarified and strengthened with the restructuring of the Foreign Investment Promotion Board and the decision to establish a Foreign Investment Promotion Council.
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