At the time of independence, India had sterling balance of Rs. 1733 crore. This was a sizable surplus on Balance of Payment with UK during Second World War, when UK made large scale import from India. During first Plan period Balance of Payment situation was satisfactory, deficit on current account was only 42.5 crore. Dr. Bimal Jalan divides the period after 1956-57 into three sub-periods depending on two criteria as a measure of balance of payment problem in a particular year:
(i) A current account deficit of more than one percent of GDP.
(ii) Foreign exchange reserves less than necessary to cover three month’s imports. The three sub-periods are: 1956-57 to 1975-76, 1976-77 to 1979-80 and 1980-81 to 1992-93. To the above three sub-periods we may add a fourth period, i.e., the period after 1993-94.
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During Period I and III, overall balance of payment situation was difficult, because both the criteria were fulfilled.
1. Period 1-1956-57 to 1975-76:
In the Second Five Year Plan, India laid emphasis on the development of heavy and basic industries which necessitated large scale imports of machinery and capital equipments.
The consequent trade deficit was much more than the net surplus invisible transfers and surplus capital account. As a result, India resorted to borrowing from the IMF to some extent and the remaining deficit was met from the official reserves account.
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Throughout the late 50s, India experienced an outflow from the official reserves account towards meeting the balance of payments requirements. As a result, the foreign exchange reserves of the country declined sharply.
Other problems faced were large scale imports of food grains and machinery and equipments in early 60’s (This lead to a sharp increase in trade and current account deficits). Three wars 1962 with China, 1965 with Pakistan, 1971 with Pakistan,
a. Severe drought of 1965-66 and 1966-67
b. First oil shock of 1973 (oil price increased from $ 2.5 to $ 11.65 barrel)
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Heavy trade deficits, debts obligations and a sharp fall in foreign exchange reserves led to the devaluation of the rupee in 1966. The rupee was devalued against the US dollar by 57.5 percent. Though after devaluation, government restored severe import-control and forex regulation.
a. Current account deficit stood at 1.8% of GDP.
b. Forex reserves less than necessary to cover 3 months imports.
c. Most important fact was substantial financial assistance to meet Balance of Payment on concessional terms. In fact it was 92% of current account deficit.
2. Period II (1976-77 to 1979-80, Golden Period of Balance of Payment):
Relatively short period as golden period for India as far as balance of payment is concerned. This period is termed as golden period since current account had surplus of 0.6% of GDP during this period and forex reserve could meet 7 months import need. The relatively comfortable position was due to:
1. Large scale private remittance from oil exporting countries. Labour skilled and unskilled and NRIs kept sending net earnings to India and amounted Rs. 3,128 crore over 5th plan.
2. There was strong growth in export due to conducive situation of world trade (grew at 8% during this period).
3. Domestic measures to increase oil production within country and arrest the import of oil. Impact import of crude oil in volume term did not increase in this period.
4. Substantial expansion of Indian firm’s activities in Middle East oil exporting countries in construction services helped to earn forex.
5. Aid receipt was reasonably buoyant during 1973-74 to 1975-76.
Because of these measures India absorbed to first oil shook rather quickly. There was surplus in two years of 5th plan 1976-77 and 1977-78 on current account. 5th plan as a whole deficit was only Rs 1,146 crore on current account.
Second oil stock of 1979-80 increased trade deficit. It was Rs. 3,374 crores in 1979-80, Rs. 5,967 crores in 1980-81 but current account deficit was only Rs. 234 crores in 1979-80, Rs. 1,657 crores in 1980-81 due to large inflow of the invisible items.
3. Period III (1980-81 to 1992-93):
This period marked severe balance of payment difficulties. Sixth Plan more or less averaged above Rs. 6,000 crores per annum BOP deficit. First three years of Seventh Plan averaged Rs. 9,000 crores BOP deficit while last two years of 7th plan Rs. 12,000 crores/annum BOP and 1990-91 touched all time high deficit of Rs. 16,934 crores in BOP and current account deficit Rs. 17,369 crore.
Gulf war further deteriorated the balance of payment situation due to decrease in remittance. Structural adjustment programme under new economic policy liberalised import of a number of capital goods, raw material, intermediate and other goods. So, it increases further import which led to current account deficit of 1.8% of GDP in 1992-93 which was higher than safe limit of 1% as prescribed by Bimal Jalan.
It should be remembered that during this period, particularly, by June 1991, the level of foreign exchange reserves dropped so precipitously that they were barely sufficient to finance imports for a fortnight. A default on payments for the first time in Indian history had become a serious possibility in June 1991.
During 1992-93, with the lifting of import curbs, import growth picked up. Since the growth in exports was not that significant, trade deficit, once again, increased both in rupee and dollar terms.
The invisible account recorded deterioration as travel receipts suffered due to decline in travel arrivals. Private transfers remained more or less stable. On the other hand, there was a rise in the outgo on interest payments, royalties, technical fees and miscellaneous payments. As a result, current account deficit increased from Rs. 2,237 crore/US$ 1,178 million in 1991-92 to Rs. 12,764 crore/US $ 3,526 million in 1992-93.
4. Period IV (1993-94 onwards):
During 1993-94, there was a distinct improvement in the balance of payments position. A significant growth in exports, the fall in international prices of crude oil and the slack in the growth of non-POL (Petroleum, Oil, Lubricants) imports resulted in a sharp contraction in trade deficit.
The decline in international interest rate also provided a measure of saving in the invisible account. The market determined exchanged rate led to strong growth in remittances. As a result of all these, the current account deficit declined significantly.
India faced severe BOP crisis in the years 1990-91 and 1991-92 but in the Fourth Period the BOP position was becoming comfortable.
The current account deficit which signifies country’s overall current liabilities has come down from a level of 3.1 percent of GDP in 1990-91 to a current account surplus of 0.3% of GDP in 2001-02. The current account turned into a surplus in 2001-02 after a gap of 23 years (current account surplus was last recorded in 1977-78).
The foreign exchange reserves were less than $1 billion in 1990-91 and it increased to US$ 100 billion as on December 2003. The external debt to GDP ratio decreased from 28.7 % in 1990-91 to 20.1 % in 2001-02 and debt-service ratio. (Debt service ratio is the proportion of annual export revenues (from goods and services) of a country which constitutes its repayment obligations of the principal and interest on external debt for the year) decreased from 35.5% in 1990-91 to 14.2% in 2001- 02. The short-term debt to total debt ratio decreased from 10.3% in 1990-91 to 3.0% in 2001-02.