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International Trade and Finance

Notes (b) A deliberate policy of prioritizing the use to which external debt is to be put should be
pursued and no approval should be accorded for any commercial loan with a maturity of
less than five years for the present.
(c) The Committee was of the view that efforts should be made to replace debt flows with
equity flows. However, it recognised that direct foreign investment would contain both
debt and equity, and the system of approvals is applicable to all external debt. Therefore,
as an operational guideline, the approval of debt linked to equity should be limited to
ratio of 1 : 2.
4. The minimum foreign exchange reserves target should be fixed in such a way that the reserves
are generally in a position to accommodate imports of three months.
A careful perusal of the recommendations of Rangarajan Panel on balance of payments reveals that it
aimed to halt the process of indiscriminate permissions in the name of foreign investments in any
branch of economic activity. The Committee, therefore, cautioned against extending concessions or
facilities to foreign investors which are more favourable than what are offered to domestic investors.
Similarly, the Committee has insisted that there should be a policy of prioritizing the use to which
external debt should be put. The Report of Rangarajan Committee was a timely warning to manage
our external debt and thus salvage our economy.
32.3 Balance of Payment Since the New Economic Reforms of 1991

New economic reforms were initiated in 1991 and an effort was made to step up exports so that a
major part of the import bill is paid for by exports. Secondly, with a view to bring about technological
upgrdation, imports were liberalised. Along with this, in place of debt-creating inflows of capital,
non-debt creating inflows such as foreign direct investment as well as portfolio investment were
encouraged. The result of all these measures has been summarized in Table 2.
Data provided in Table 2 rveal that the most notable feature of the changing scenario in the balance
of payments situation is that there has been a sharp increase in the coverage of imports by export
earnings. In 1990-91, export earnings accounted for merely 66.2% of import bill, and this ratio sharply
improved to 84.8% in1993-94. Economic Survey (1994-95), therefore, asserted : “The recent
developments in India’s external sector reflect a shift from a foreign-exchange constrained control
regime to a more open market driven and liberalised economy. This has been facilitated by the
structural change in the country’ s balance of payments which has occured during the last few years.
The most notable feature of this change has been the sharp increase in the coverage of imports by
export earnings... during the last 3 years export earnings have, on an average, accounted for nearly
90 per cent of the value of imports”. This marked improvement in the export-import ratio combined
with an improvement in the invisibles account, has resulted in a sharp reduction in the current account
deficit, which had come down from unsustainable levels of more than 3.2 percent of GDP to less than
half a percent by 2003-04, but by the year 2007-08 it again surged to 1.5 percent GDP. In the meanwhile
in few years even current account deficit turned to be surplus. This has been made possible due to
rising export-import ratio till 2002-03 and later it started dipping again and came down as low as 60.6
percent in 2009-10. In 2010-11 it improved to 65.7 percent.
Table 2 also indicates that dependence on external assistance and external commercial borrowing
has come down markedly. The ratio of external assistance to total capital inflow which had risen to
about 27 per cent in 1990-91 came down to 19 per cent in 1993-94, but has risen again to 30 per cent in
1995-96 but continuously declined thereafter to reach a low level of 3.8 per cent in 2006-07. Similarly,
external commercial borrowing which accounted for about 26 per cent of the total capital inflows in
1990-91 has again increased to 42 per cent in 1995-96 and further risen to 50.6 in 2000-01. But since
rates of interest in the world markets have sharply gone down, this has resulted in a decline in debt
service ratio. Table 2 reveals that debt service ratio which was 35.3 per cent in 1990-91 has also declined
to 13.6 per cent in 2001-02. It has further declined to 6.1 per cent in 2004-05 but was 8.3 percent in
2010-11. The Government has, therefore, claimed that the economy has thus moved to a more stable
and sustainable balance of payments in the nineties.
Another healthy feature of the changing scenario is that foreign reserves have more than doubled
during 1993-94, from US $ 6.4 billion at the end of March 1993 to US $ 15.1 billion at the end of March

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