Académique Documents
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Bhuvaneshwari R Chaitra J Chandramohan Nayak M Neelu K Pragya P Madhusudanaan NM PGP 14/206 PGP 14/207 14/207 PGP 14/209 14/209 PGP 14/216 14/216 PGP 14/221 14/221 PGP 14/225 14/225
Agenda
Overview of the crisis Balance of Payments the machinery India before the crisis Events leading to the crisis The Crisis and recovery Post Crisis India Conclusion
BoP- An Introduction
An accounting record of all monetary transactions between a country and the rest of the world Sources of funds : positive or surplus item
Exports, receipts of loans and investments
Capital account
Reserves account along with the loans and investment between the country and the RoW
Types of Deficits
A visible trade deficit A nation is importing more physical goods than it exports An overall current account deficit A basic deficit Current account plus foreign direct investment
Balancing Mechanisms
Rebalancing by changing the exchange rate Rebalancing by adjusting internal prices and demand
CA = NS NI
Non-POL imports rose at an average rate of 3.6% in dollar terms whereas exports increased at rate of 3.2% in volume terms
External Borrowings
Debt Trap
The Crisis
1990 1992 Ugly Series of unfortunate events Gulf crisis of 1990 increase in oil import bill Burden of repatriating and rehabilitating of NRIs from West Asia Deterioration of invisible account Increase in price of oil => overall current account deficit in 1990-91 : US $ 9.7 billion
Important trading partners grew weak US, Russia World growth declined from 4.5% in 1988 to 2.5% in 1991 Result : Export volume growth reduced to 4% Political turmoil VP Singh government overthrown, Rajiv Gandhi assassination reduced credibility of India
Revival
Government 2 tasks
Compress imports Find exceptional financing
Unorthodox steps taken Pledging of gold Adjustment in exchange rate Structural reforms in trade, industrial and foreign investment policies Loss of reserves stemmed by less imports Result : 1991-92 ended with current account deficit of less than 1% of GDP!
Corrective Policies
conscious policy of industrial de-regulation exchange rate was devalued system transformation from discretionary, basket-pegged system, to a market-determined, unified exchange rate, following a short intermediate period of dual rates Anti-export bias in the trade and payments regime was also reduced substantially
A phased reduction in the exceptionally high customs tariffs A phased elimination of quantitative restrictions on imports
Corrective Policies
Policies were initiated to encourage both direct and portfolio foreign investment Short-term debt was reduced and strict controls put in place to prevent future expansion Medium-term borrowing from private commercial sources was made subject to annual caps and minimum maturity requirements Growth of NRI deposits was moderated through reduction of incentives Foreign exchange reserves were consciously accumulated to provide greater insurance against external sector stresses and uncertainties
Effects of Liberalization
Trade and Investment Flows
Surge in exports Significant rise in foreign direct investment and other capital flows Substantial increase in private transfers under the category of invisibles in balance of payments account In ten years, 1991- 2001,
Over 37 billion dollars of foreign investment flowed 18 billion $ was direct investment, i.e., an average of 2.2 billion $ per year.
Effects of Liberalization
Trade and Investment Flows Private transfers grew to a level of 10-12 billion dollars in the latter half of 1990s. Export growth momentum and the exchange rate reforms - the two major factors which helped contain the current account deficit in BOP to 1 to 1.5 per cent of GDP between 1991 and 2001
Effects of Liberalization
Balance of Payment Surplus
NRI deposits with the banking system in India on the rise from 13 billion dollars in 1991-92 to 23.8 billion dollars by March 2001 Balance of payments recorded an overall surplus consecutively for five years from 1996-97 Indias foreign exchange reserves, barely one billion in the pre-crisis year reached $ 40 billion (other than gold and SDR) - the average annual addition being 4.5 billion dollars
Effects of Liberalization
Balance of Payment Surplus External sector - growth rates moving up to 11 and 20% in the two years ended March 2001 India successfully withstood the fall-out effects of the Asian financial turmoil in 1997 the economic sanctions imposed by USA and other countries following the nuclear tests in May 1998t the sharp rise in international oil prices since the closing months of 1999.
10.6 21 13.6 9.1 30.6 26.8 31.8 36.7 20.1 48.1 25.2 10.9
0 10 20 30 40 50
-8.4
-10
1980-81 1991-92
1985-86 1992-93
1986-87 1993-94
1987-88 1994-95
1988-89 1995-96
1989-90 1996-97
1990-91
External Assistance
EXTERNAL ASSISTANCE/TC (%)
70
60.9
60 50 40 30 20 10 0
63.9
43.7
34.6
1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1980-81 1991-92 1985-86 1992-93 1986-87 1993-94 1987-88 1994-95 1988-89 1995-96 1989-90 1996-97 1990-91
Export Growth
EXPORT GROWTH (%)
25
20.2
20
20.3
20.4
15
11.6
Axis Title 10
9
5
5.6
4.5
-3.9
-10
Growth of Imports
GROWTH OF IMPORTS (%)
25
21.6
20
16.5
15
14.4 12.1 10
Axis Title
10
4.6
-7.1
-10
Conclusions
Can liberalized trade policies land us again in the problems that we faced few years back? Market determined exchange rate-lead us to nearly equilibrium status Market can provide advanced warning signals POL imports needs special attention to protect from external shocks Experts opinion: Maintain 15% annual exports growth!