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Unit 32 : India’s Balance of Payment

pursued underpressure from World Bank/IMF lobbies. Another disturbing feature of the situation Notes
was that export promotion has not been commensurate with the increase of imports.
Balance of Payment in the Seventh Plan and Thereafter

During the Seventh Plan (1985-86 to 1989-90), trade deficit of the order of ` 54,204 crores emerged.
Net favourable balance in the invisible account was of the order of ` 13,157 crores and thus net
balance of payment on current account was ` 41,047 crores. Economists identified the following
factors :
Firstly, despite an encouraging rate of growth of exports, the pressure on the balance of payments
has increased. During the Seventh Plan, the annual rate of growth of exports was of the order of
18.7 per cent per annum, but the rate of growth of imports was of the order of 16.8 per cent per
annum. Since we started with a large volume of imports, even a smaller percentage growth of imports
was able to offset a larger growth rate of exports and thus the deficit in balance of trade in absolute
terms became higher.
Secondly, a major factor responsible for larger inflow of imports was the policy of import liberalisation.
Thirdly, there has been an increase in import-intensity due to the pattern of industrial development
promoted during the Seventh Plan which catered to the demands thrown up by the upper income
groups of the population. The shifts in income distribution in favour of the neo-rich classes resulted
in higher demand for consumer durables, mention may be made of colour TVs, VCRs, air conditioners,
refrigerators, motor cycles, cars, and other gadgetry. All these items of elitist consumption required
assembly of kits, machinery and components imported from abroad. Thus luxury-consumption-led
growth during the eighties could be appropriately described as import-intensive industrialisation.
During 1980’s as against the overall industrial growth of 7.7 per cent per annum, the growth rate of
consumer durables segment was of the order of 12.4 per cent per annum.
Lastly, the relative steep depreciation of the rupee vis-a-vis other currencies also led to an increase in
the value of imports. From ` 12.82 per dollar at the end of 1987, the rate of exchange depreciated to
` 18.05 at the end of 1989 and was around ` 31.36 per dollar in April 1993.
At the outset, it should be realised that the problem of adverse balance of payments of India is
essentially due to the huge trade deficit which, in turn, is partly the result of persistently rising
imports and partly due to slowly rising exports. The ultimate solution has to be found in restricting
imports to the unavoidable minimum and promoting exports to the maximum.
Professor Sukhmoy Chakravarty in his work “Development Planning—the Indian Experience (1987)”
questioning the policy of liberal imports wrote : “In my judgement, India’s balance of payments is
likely to come under pressure unless we carry out a policy of import substitution in certain crucial
sectors. These sectors include energy, edible oils and nitrogenous fertilizers. In all these sectors, except
fertilizers, India is getting increasingly dependent on imports resulting in a volatile balance of payments
situation.”
Rangarajan Panel for Correcting BOP

Dr. C. Rangarajan, former Governor, Reserve Bank of India who headed the high level committee on
balance of payments submitted its report on June 4, 1993. The Committee made the following findings
and recommendations :
1. The Committee stressed the fact that a realistic exchange rate and a gradual relaxation of
restrictions on current account transactions have to go hand in hand.
2. The Committee suggested that the current account deficit of 1.6 per cent of GDP should be
treated as ceiling rather than as target.
3. A number of recommendations were made regarding foreign borrowings, foreign investment
and external debt management. Very important among them were :
(a) The Government must exercise caution against extending concessions or facilities to foreign
investors, which are more favourable than what are offered to domestic investors and
also against enhancing external debt to supplement equity.

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