India’s Balance of Payments since Independence
It’s often needed to know the financial status of a nation and summarize its transactions with outer world. A systematic record of all such economic transactions between the residents of a country and the rest of the world is known as balance of payments, shortly known as BOP. It consists of all bills received on account of commodities exported, services rendered and capital received by residents. It will keep track of all payments given on account of goods imported, services received and capital transferred to non-residents of a country. BOP consists of a capital account component showing the volume of foreign investments and public loans and grants given by other countries, a current account recording exports and imports and cash account which is the balancing item to equalize the sum of both. Cash account consists of gold stock, foreign currencies and special drawing rights and it’s also known as official reserve assets. A current account shows the flow of goods and services of a particular recorded year.
What’s its significance?
Its importance lies in the fact that it can serve as an economic barometer or indicator to know the economic prospects of a nation in a short term. It can also be used to calculate extend of international solvency and to know the current exchange rate of a nation’s currency in the present conditions. Since it represents international economic and financial position of a country, BOP can also be included while taking monetary and fiscal decisions of the government, particularly when external trade and issues are the primary factors. BOP also shows its dependency on other nations, particularly for developing countries like India. Though it acts as an economic barometer, it cannot be taken as an indicator of economic prosperity always and its deficit value never indicates that the nation is bankrupt. But it can imply fundamental economic problems of the country. It just deals with transactions of a particular period thus helping in knowing its economic dealings with other countries.
India’s Balance of Payments since its independence
India launched its economic planning in the early 50’s and its BOP position was more or less comfortable. But very soon in the financial year 1951-52, India saw a large trade deficit, which led to overall deficit in both the current and capital accounts leading to the depletion of cash account. Throughout the second half of 50s India had to provide fund from official reserves to meet the balance of payments requirements which further decreased foreign exchange reserves sharply. This declination didn’t improve in the early 60’s also. Since import of food grains and machinery increased considerably during this period, IMF borrowings through loans helped to meet current account deficit to some extend. Thus official reserves account declined sharply till the middle half of 60’s. Seventies witnessed growth in exports, but it had to face imports too, in the form of machinery, capital goods etc. India even had deficits in terms of invisible transfers. Oil price hike was acted as a shock treatment as far as economic status of India is concerned. But, it was smoothened by some exports, private transfer receipts and some external aids.
During 1980’s some issues relating to BOP came to centre stage. It was soon after the second price hike of petroleum products in 1979. Also, total imports doubled within this short period. Again the next shock came in the form of international recession in the period 1980-83 which depressed exports further. Again IMF borrowings and external assistance helped to control the balance of payments position. The second half of 80s witnessed the building up of pressures on the balance of payments. In the year 1990, Gulf crisis led to a sharp increase in oil prices which further saw a sharp increase in the import bill of POL. As capital accounts increased, problems on the current account went up. Later it saw a sharp decline in imports when Indian currency was devaluated and exports were increased. It happened in the early 90’s. But during 1992-93, when certain restrictions on imports were lifted import growth picked up. Also, growth in exports was not that much significant which again lifted trade deficits. Again in 1993-94, fall of crude prices and increase of exports showed improvements in the balance of payments position. With the liberalization of foreign investment policy, the flow of foreign funds started increasing.
India’s Balance of Payments – Viable or Vulnerable?
Independent India has experience BOP crisis twice – First in mid 60s and the second in early 90s, which was more severe. Since the crisis years from 1990-92, India has come a long way. Still steps needed to ensure that such crises won’t appear again. Though a few exceptions are there, India is still far behind both in trade and current accounts. So, the primary objective should be to keep current account deficit level there itself from further falling down so that it can be compensated with capital inflows. So, stress should be given to increase the export level, while keeping imports under control. Also, if domestic production of petroleum is promoted, it can bring down import of petroleum and its products considerably. Significant and consistent increase in export rate can bring down a turn around in imports by removing vulnerability of India’s BOP.
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