What are the Suggestions to Improve the India's Balance of Payment?



As suggested by Prof. Sukhmoy Chakravarty in his book Development Planning - the Indian Experience (1987), to relieve the pressure on our BoP, we have to carry out a policy of impart substitution in certain crucial sectors, such as, energy, edible oils and nitrogenous fertilisers.

Secondly, efforts need to be made for raising our earnings from invisibles India should encourage tourism by developing new tourist spots and improving the facilities at the existing ones.

Thirdly, the country should take advantage of GATT 1994 in boosting its export of software and services in software programming.

Fourthly, efforts should be made to explore and territories of export markets.

Fifthly, India's import-export structures should be changed radically with modernisation and growth of its industrial development through technological upgraduation.

Sixthly, India's export industries should be made more efficient and competent. Qualities of Indian products must come upto international standards and foreign buyers' expectations.

Seventhly, the government should accept the recommendations of the Rangarajan Committee (1993) for correcting the BoP and act upon. Especially, the suggestions such as:

1. A realistic exchange rate and a gradual relaxation of restrictions on current account transactions have to go hand in hand;

2. Trade policy are exchange rate regime should be managed for stability as well as promoting exports - so that, India's annual exports growth in dollar term should at least be 15 per cent on an average.

3. The current account deficit of 1.6 per cent of GDP projected for the eighth plan be treated as ceiling rather than as target;

4. The government should exercise caution against extending concessions or facilities to foreign investors;

5. A cautious policy is needed for guarantee external borrowings;

6. Efforts should be made to replace debt flow with equity flow;

7. The approval of debt linked to equity should be limited to ratio of 1:2;

8. A national law should be framed to codify the existing policy and practices relating to dividend repatriation, disinvestment, 'employment of foreign nationals, etc.

9. The country's recourse to external debt should be continuously monitorial over the eighth plan period to ensure sustainability, cost-effectiveness and use-efficiency.

10. India's recourse to exceptional financing, including IMF credit, would be inevitable. But the objective would be to phase out exceptional financing needs by the end of the eighth plan.

11. The Committee laid down fine principle towards the policy of management of short-term debt. These are: (a) Short-term debt should be permitted only for trade related purposes; (b) Resources to short-term debt should not be taken as an instrument for protecting reserves; (c) The roll-over beyond 6 months should be agreed without careful consideration of implications; (d) Any short-term debt falling outside these three norms should be specifically approved by the RBI.

It should be ensured that such debt is based on cost or trade-related considerations; (e) The RBI should form a monitoring system for such debts and make it easy to ascertain the amount of such debts at any point of time.

12. The Committee does not favour debt refinance as a solution to a BoP crisis.

13. Further, in its view, debt-equity conversion is undesirable for debt management in India.

14. The Committee insists that the minimum foreign exchange reserves should be maintained which can enable the imports of atleast 3 months.

15. There should be a policy. A prioritising the use to which external debt should point.

In this way, the committee suggests that the government's role is an active and vigilant manager external debt.

The new economic and trade policy measures have started paying dividend. The year 1993-94 witnessed a spectacularly favourable balance of payments with foreign exchange reserves touching the 15 billion mark in March 1994. By July 1994 it has crossed the 16 billion mark. However, a large part of these reserves is contributed by NRI deposits, Euro-issues, etc., rather than export earnings. Hence, the country must remain always conscious to sustain its BoP position through increasing exports growth rate in real and dollar terms.

In 1995-96 India's exports in dollar terms increased by about 21 per cent, at the same time her imports increased by 28 per cent resulting into increase in trade deficit to 4,881 million US dollars.

In 1996-97 India's export growth rate slowed down to around 4 per cent and import to 5 per cent, consequently trade deficit increased further to 5,442 million US dollars. India should take domestic steps to boost exports and reduce imports to overcome this adversity in BoP.