The year 1990-91 was the most difficult one for India on the balance of payments front. The global slowdown in world trade following the recessionary conditions in the industrialised countries and the economic disruption in Eastern Europe including the USSR affected India’s exports. The Gulf crisis emerging in August 1990 caused sharp increases in the oil import bill due to steep increase in prices and also volume growth in the wake of relative stagnation in domestic output of crude production.
All these factors led to the widening of the trade deficit to about Rs. 17,000 crores. The foreign currency reserves had shrunk to less than two weeks’ imports. During September 1990, Standard and Poor, a credit rating agency of USA, classified India among the nations that were likely to default on the external obligations. Other agencies like Moody’s also downgraded India’s credit rating.
The following short-term measures adopted by Reserve Bank of India and the government saved the situation: (i) Obtaining two loans from IMF amounting to SDR 1260 million. (ii) Securing loans of $ 400 million from Bank of England by pledging gold. (iii) Issue of India Development Bonds for NIRs and Amnesty Scheme for NIRs which together brought in Rs. 4,000 crores. (iv) Raising the margin requirements for import letters of credit. (v) Restrictions on foreign exchange allocations for imports. (vi) Hiking the interest for imports. (vii) Restriction on import of capital goods only under foreign currency line of credit available with financial institutions. (viii) Differential interest for export advances charging higher rates for longer periods.
Liberalisation Efforts. Although the country could manage the situation and avoid impending crisis through the short-term measures described above, it was felt that time was ripe to undertake certain fundamenial changes in the economic policies to have a lasting solution.
(i) Devaluation of rupee. To revive the exports growth the Reserve Bank devalued rupee in July 1991 against major international currencies by about 20%. However, the cash compensatory support scheme was withdrawn.
(ii) LERMS. Under the Liberalised Exchange Rate Management System, implemented in stages, the movement towards convertibility of rupee was initi-ated. First, 60% of the exchange transactions were converted at market determined rates and 40% converted at the official rate based on the RBI rate. Subsequently, the scheme was further liberalised and now 100% of the transaction is converted at the market determined rates only. The intervention currency for rupee has been changed from pound-sterling to US dollar. The RBI announces a reference rate in terms of which it is willing to purchase the dollars. There is no more any obligation for the authorised dealers to surrender part of their exchange to RBI as was preva-lent under the 60 : 40 regime.
The country has opted for full convertibility of rupee on current account. It has moved over to Article VIII status in the International Monetary Fund on cur-rent account convertibility of the rupee with effect from 20th August 1994. By this decision, the country has undertaken to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval.
(iii) Trade Policies. Many curbs on exports and imports have been lifted. The era of elaborate licensing procedure for imports has come to an end. Now a small negative list says which are the items subject to control or banned for imports. Any item not in this small negative list can be freely imported. The office of the Chief Controller of Imports and Exports has been redesignated as the Director General of Foreign Trade to reflect the emphasis from control to development.
(iv) FERA. A number of changes have been made in the Foreign Exchange Regulation Act, mainly to encourage foreign investment in India. Foreign companies are now allowed to set up trading houses, branches, use of foreign trade names, borrow money and accept deposits and deal in immovable property. The FERA companies have been placed on par with Indian companies for all operational purposes.
Foreign citizens and companies can now raise foreign equity up to 51% (ear-lier ceiling was 40%). Non-resident Indians returning to India for good are allowed to maintain and operate foreign currency denominated accounts with banks in India without any limit on the balance in such accounts.
Present Scenario. The liberalisation process has encouraged inflow of foreign funds. India’s foreign exchange assets (excluding gold and Special Drawing Rights) have risen steadily in the post-reforms period, from a level of just $ 1.12 billion in June 1991, to S 6.2 billion in June 1992, $ 6.5 billion in June 1993 and $16.4 billion in June 1994 and $ 19.5 billion in November 1994. This increase in reserves has helped the rupee to remain remarkably stable vis-a-vis The US dollar since around March 1992.
Considering that the inflation during this period has been around 10% per annum the rupee has actually appreciated in real terms and which, combined with lower inflation rates in other major econoinies, has rendered Indian exports more expensive and imports correspondingly cheaper. The success achieved in improving the reserves is not reflected in the trade or current account balances. In fact, in the entire post-reforms period starting 1991-92, the economy has recorded deficits in both the trade and current accounts. In the early part of the period, the improvement in the reserves position Was basically brought about by assistance from the World Bank and bilateral donors, amounting to around $ 2.8 billion and net IMF drawals worth $ 2.3 billion. During 1993-94, the growth was due to large inflow of foreign capital through Euro issues, portfo-lio investment in the stock markets and direct foreign investment.
The galloping increase in foreign exchange reserves witnessed since the middle of 1995 has been arrested. Since November 1994, the reserves have remained stable at around $ 19.3 billion. One possible reason for this slowdown could be the application of the new guidelines for Euro issues which link remittance of proceeds of the capital issues to execution of projects. There is also decline in the inflow of new foreign portfolio investment.
During April-September 1996, the foreign trade growth showed a slower trend as compared to the corresponding period during the previous year. Exports at USD 16140 million was an increase of 9.91%. Imports grew at 5.2% to reach USD 17953 million. (Growth rate during the previous year was 26.37% in exports and 32.79% in imports.) The trade gap reduced to USD 1813 million as against USD 2381 million during the previous year.
The current indications are that the year 1996-97 may end up with an overall trade deficit of USD 4000-4500 million as against the deficit of USD 7015 million in 1995-96.
One disturbing feature is that the growth in imports has been accounted solely by oil imports which showed an increase of 42.1% at USD 4428 million. The trend is likely to continue in view of the spurt in world prices of oil. Also the purchase of crude and petroleum products in world markets will have to be in large volume as the domestic output of crude will be only 33.72 million tonnes in 1996-97 against 35.17 million tonnes in 1995-96. All these will lead to increase in oil bill.
The non-oil imports showed a drop of 3.04%. It is not clear if the smaller rise in imports even in rupee terms is due to the slower rise in exports or an accumulation of inventories with the manufacturers using imported intermediaries and com-ponents or whether the decline is on account of reduced purchase of plant and machinery or arrivals of CKD and SKD packs. If there has been an elimination of unwanted imports or reduction in special items, the export effort may not be seri-ously affected and the growth in industrial production also may turn out to be satisfactory.
The overall picture is that since the dependence on oil imports is increasing the export effort has to be intensified for maximising foreign exchange earnings and preventing an enlargement of the trade deficit.