Page 379 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

Unit 32 : India’s Balance of Payment

While India had been experiencing persistent trade deficit, she had generally a surplus in net invisibles; Notes
accordingly India’s adverse balance of payment during the First Plan was only ` 42 crores. The overall
picture during the First Plan was, however, quite satisfactory.
1956-57 to 1960-61—The Second Plan Period
An important feature of the Second Plan period was the heavy deficit in the balance of trade which
aggregated to ` 2,339 crores. Earnings on account of invisibles and donations from friendly countries
totalled ` 614 crores. Making an allowance for these, the unfavourableness in the balance of payments
during the Second Plan period was of the order of ` 1,725 crores. The highly unfavourable balance of
payments in the Second Plan was the result of (a) heavy imports of capital goods to develop heavy
and basic industries, (b) the failure of agricultural production to rise to meet the growing demand for
food and raw materials from a rapidly growing population and expanding industry; (c) the inability
of the economy to increase exports; and (d) the necessity of making minimum ‘maintenance imports’
for a developing economy. As a result, the foreign exchange reserves sharply declined and the country
was left with no choice but to think of ways and means to restrict imports and expand exports.
Third Plan and Annual Plans and BOP
From Table 1 it is clear that the balance on current account was unfavourable during the Third Plan.
This was mainly because (a) imports were expanding faster under the impact of defence and
development and to overcome domestic shortages (import of foodgrains, for example) and (b) exports
were extremely sluggish and failed to match imports. The imbalance in the current account of over
` 1,951 crores was financed by loans from foreign countries, PL 480 and PL 665 funds, loans from the
World Bank and withdrawals from I.M.F. In spite of all these loans, assistance and withdrawals,
there was also some depletion of foreign exchange reserves of the country.
The serious adverse balance of payments which started with the Second Plan continued relentlessly
during the Third and the Annual Plans.
It will be observed that the trade deficit during the Annual Plans was quite large. This was because of
the heavy imports of foodgrains to overcome famine conditions and internal shortage of foodgrains
on the one side and inadequate exports due to economic recession on the other. Besides, devaluation
of the rupee was a failure and instead of reducing the trade balance deficit, it further aggravated it. A
very interesting development in this period was that net invisibles which used to be positive and
which used to reduce the trade deficit, either dwindled or even became negative (for the first time).
During this period, heavy amount had to be paid by India in the form of interest payments on loans
contracted earlier. This wiped out the surplus on invisible account. Consequently, the influence on
net invisibles in reducing the balance of payments deficit was negligible.
1969-70 to l973-74 : The Fourth Plan Period
One of the objectives of the Fourth Plan was self-reliance—i.e., import substitution of certain critical
commodities (which are of key importance for the Indian economy) on the one side and export
promotion so as to match the rising import bill, on the other. Accordingly, the Government managed
to restrict imports and succeeded in expanding exports. On the import side, restriction of imports
was made possible through good crops in 1968-69 and 1970-71, and consequent significant reduction
of imports of foodgrains. On the export side, vigorous export promotion measures succeeded in
boosting exports of traditional as well as non-traditional items.
The abnormal favourableness in the invisibles account in 1973-74 was due to the receipt of ` 1,680
crores from U.S.A. on the disposition of PL 480 and other rupee funds. The trade deficit during the
Fourth Plan was ` 1,564 crores and the surplus in net invisibles accounted for ` 1,664 crores. The net
result was a surplus in the balance of payments, for the first time, though the surplus was only a
nominal amount of ` 100 crores.
1975-76 to 1978-79 : The Fifth Plan Period
During the Fifth Plan, trade balance was affected by two factors : (a) the value of imports was rapidly
mounting due to the hike in oil prices, and (b) the value of exports was also rising under the impact

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