Short Essay on the India’s Problem of BoP Deficit

Since the inception of planning era in 1951, India has been facing the problem of BoP deficit: (i) Trade deficit, and (ii) Current account deficit.

A bird’s eye-view of India’s BoP deficit during the plan period is presented in Table 35.1. Data in Table 35.2 represent BoP data for period 1980-81 onwards.

The following observations are noteworthy regarding the country’s BoP problem.

1. Continuously rising BoP deficit during the planning period is a serious problem. The trade deficit has increased hundred fold from Rs. 542 crore in the I plan period to Rs. 54,204 in the VII plan period. Likewise, current account BoP deficit has increased from Rs. 42 crore in the first plan to Rs. 41,041 crore in the Seventh Plan.

2. During the beginning of the nineties, trade deficit has been very high at US$ 9,437 million in 1990-91. The current account BoP deficit was US $ 9,679 million in 1990-91. The new government succeeded in reducing the trade deficit to US $ 2,124 million which accounted for less than 1 per cent of GDP as against that of 3.2 per cent of GDP, in the previous year. Similarly, the current account BoP was reduced to US $ 2,135 million in 1991-92.

3. In 1992-93, however, the trade deficit rose to US $ 4,106 million constituting 1.6 per cent of GDP. The current account deficit also increased to US $ 4,921 million accounting to 2.1 per cent of GDP.

4. The trade deficit during 1993-94 declined substantially to about a billion dollars (or 1000 million dollars).

5. As a result of big size and increase of BoP deficit India has been facing a great strain on foreign exchange reserves. The trend of country’s foreign exchange reserve position is revealed by the data contained in Table 35.3.

The holding of foreign currency assets by the RBI reduced from US $ 1,914 million in 1950-51; to US $ 390 million in 1960-61. In 1980-81 the foreign currency asset holdings increased to 5,850. In 1990-91, however, the foreign currency asset holdings declined to US 2,236. The country’s holding of total foreign exchange reserves also declined to 5,834 million in 1990-91. Thereafter, the situation as remarkably improved on account of the new economic and trade policy of the government. The foreign currency asset holding by the RBI increased to US $ 20,809 million in 1994-95. The country’s total foreign exchange reserves increased to US 25,186 million in this year. It has increased to US $ 26,423 million in 1996-97.

6. Special Drawing Rights (SDRs) holdings of the government’s declined from US 120 million •in 1980-81 to US 1.7 million in 1994-95.

7. To meet the huge BoP deficits, the country to borrow huge loans from the IMF and other sources. Consequently, the country’s external debt (excluding defence debt) increased from US 57,328 million in 1989 to US 79,221 million in 1993.

8. Due to even expanding BoP deficit, the external value of rupee has continuously deteriorated over the years. Rupee’s nominal effective exchange rate measured through 10-country index (the USA, Japan, the UK, Germany, France, Italy, Netherland, Belgium, Switzerland and Australia) declined from 81.25 (Base 1985 = 100) in 1986 to 39.09 in 1991 and further to 29.52 in 1992-93.

9. Persistently rising high BoP deficit and consequent borrowings on capital account endangers country’s reputation and credit-worthiness in the world. Foreign lenders may feel that the country may default on external debt. This kind of loss of confidence may result into liquidity crunch for the country when the foreigners are reluctant to give adequate and timely commercial credit. India experienced this sort of difficulty in the beginning of the nineties. Though, the situation is now better, the country is not completely out of the cobweb of troubles.