Page 212 - DECO201_MACRO_ECONOMICS_ENGLISH

Unit 12: Balance of Payments

long-term basis. There was a concerted effort by the United States, World Bank, and the IMF to Notes
use external assistance as an instrument to induce India (a) to adopt a new agricultural strategy
and (b) to devalue the rupee. The rupee was devalued by 36.5 per cent in June 1966, and tariff and
export subsidies were simultaneously rationalized, on the understanding that the inflow of aid
would be substantially increased.
The BOP improved after 1966-67 but largely because of the decline in imports. Exports performed
indifferently despite the devaluation.

Balance of Payment in the Seventies: A Decade of Comfort: India’s balance of payments remained
comfortable during the Seventies. The adjustment to the first oil shock of 1973-74 was rendered
smooth by a happy combination of buoyant exports, spurt in private transfer receipts and
increased inflow of aid. Exports, benefited by the expansion in global trade, rose at an annual
rate of 6.8 per cent in volume terms and by 15.6 per cent in US dollar terns during the decade.
Balance of Payments up to 1981-82: The Period of Difficulties: During the eighties, issues relating
to the balance of payments came to occupy the centre stage in terms of India’s Macro Economic
management.
Balance of Payments during 1982-83 to 1984-85: Easing of Pressure: A reprieve came during the
period 1982-83 to 1984-85, with the easing of pressure on the balance of payments mainly due to
a decline in the volume growth of imports from an average rate of 11.0 per cent during 1978-82
to a little over 2 per cent. Net oil imports (net of crude oil ports which commenced in 1981-82
after the discovery of crude oil in Bombay High), declined substantially as domestic production
spurted to 29.0 million tonnes by 1984-85. This indeed was the main cause of the easing of the
lance of payments. Non-POL imports rose at an average rate of 3.6 per cent in dollar terms.
Exports however, grew nearly at an average rate of 3.2 per cent, in volume terms, due to a
combination of adverse internal and external conditions.
Balance of Payments During 1985-90: The Build Up to the Crisis: The second half of the eighties
witnessed the buiIding up of strains on the balance of payments. Current account deficits acquired
a structural character, remaining at high levels throughout. Large trade deficits occurred year
after year despite a robust growth in exports. Recovering the stagnation in 1985-86, the volume
growth of exports in the succeeding four years ranged between 10 to 12 percent per annum on an
average. The share of manufactured exports rose from 56 per cent in 1980-81 to 75 per cent in
1989-90.

Notes The BOP Crisis

1990-92: In 1991, India found itself in its worst balance of payments crisis since 1947. That
there is a crisis in the making during the second half of 1980s had been evident for a long
time. The inflow of foreign borrowings had increased at a rapid rate during the late 1980s.
This was due to the excess domestic expenditure over income. Fiscal deficit of the Centre
and the States soared to over 11 per cent in 1991. During this period total public debt as a
proportion of GNP doubled reaching the level of 60 per cent and foreign currency reserves
were depleted rapidly.
The major reasons for such a high growth rate in exports were:
1. World GDP grew by an average rate of 4.1 per cent per annum during 1994-97 compared
with 2.4 per cent during 1990-1993.
2. World trade (dollar terms) grew by an average rate of 9.8 per cent per annum during
1994-1997 compared with 6 percent during 1990-1993.

LOVELY PROFESSIONAL UNIVERSITY 207