Explain about balance of payment and trends in india
Answers
Balance of Payments (BOP) of a country shows its economic strengths and weaknesses. Most of the developing countries are deficit in their Balance of Accounts, India being no exception. Since independence, India has been facing this deficit or disequilibrium in terms of BOP, largely observed as a disaster in 1990-91, the year of the severe BOP crisis. At that time, India had foreign exchange reserve of meager 1 billion dollar, hardly sufficient to finance a month’s import bill. The nation was on the edge of defaulting. This crisis resulted in large scale amendments in the country’s economic policy, particularly known as the Structural Adjustment Program or New Economic Policy (NEP) regime, center of attention being liberalization and globalization of the economy.
Trends & problems of India’s BOP – 1949-50 to 1999-2000
The disequilibrium in India’s BOP has been accounted to both internal as well as external factors.
The requirement for development of such a big nation with a large population is one of the main factors resulting in recurring BOP problem. The BOP is always under some pressure and had large deficits due to high level of imports of food grains and capital goods, the profound external borrowings, their payment and poor exports.
After independence, the primary challenge in front of the country was to attain economic growth with social justice.
Protectionist Policies
The main intention of the Second Five Year Plan (1956-57 to 1960-61) was to achieve self reliance through industrialization. Self reliance was to be realized through import substitution. For this, essential industries had to be established which required import of capital goods. Exports were anticipated to take-off by own with advent of industrialization. It was felt that with advent of industrialization, there will be an increase in production at home that will be reflected in greater export earnings.” The approach for import substitution was based on physical- interventionist, non-price policies like quotas, licensing and other physical ceilings on imports. Heavy capital goods were imported however other imports were relentlessly restricted to shut off competition for promoting domestic industries. Mainly focus was on import substitution, with gross disregard of exports. These inward looking protectionist policies did resulted in some self-reliance in the consumer goods industries, but most of the capital goods industries remained majorly import intensive.
External Debt
India had been an exercising choice to large scale foreign borrowings for its developmental activities in the field of fundamental social and industrial infrastructure. The country’s reserves were very much restricted due to low level of per capita income and savings. The situation aggravated because Government of India resorted to large amounts of foreign borrowings to rectify the BOP situation in the short run out of frightening condition. With Seventh Five Year Plan, the debt service obligations increased sharply due to stiffer average provisions of external debt, including repayments to the IMF, commercial borrowing, and a drop in concessional aid flow.
Export Promotion
Even though by the Sixth Five Year Plan we had overcome the need of food grain imports and some crude oil was also produced domestically, BOP position was still not at ease attributed to low exports. The essential need for promoting export was realized during the 1960s. The Third Five Year Plan commenced certain promotion policies pertaining to export like tax exemptions, duty drawbacks, cash compensatory schemes, Rupee devaluation etc. However it didn’t showed significant improvements in exports.
Indian exports depended largely on situation of world trade.
We were chiefly primary product exporters, for which fluctuations in prices are very high in entire world market demand.
Primary products exporting countries generally have unfavorable term of trade. The incomes from primary product exports were unstable and low.
Secondly, the Indian products were not up to the mark in terms of quality and standard to sustain in world market.
Third, mainly residue products were exported. The fact that export earnings contribute significantly to economic development was disregarded. Cumbersome procedures, rules and regulations for license etc served as disincentives for exporters. Domestic inflation further diminished the competitiveness of India’s export.
Trends in India’s BOP (2000-2010)
The benefits of foreign trade were overlooked year after year. Indian entrepreneurs were withdrawing with low-priced, outdated technology and demolishing subsidies, generating a heavy national burden of large ailing public sector undertakings. Despite acting through an incentive based approach, government protection in fact damaged our industrial growth.