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Transcript of 43593417 Indias Balance of Payments Crisis and Its Impacts 121126075853 Phpapp01
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by,
NEHA DOKANIA
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PRE-CRISIS PERIOD
BOP 1991 CRISIS: CAUSES
BOP 1991 CRISIS: IMPACTS
REFORMS AND POLICIES
DEVELOPMENTS AFTER THE CRISIS
AGENDA
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Indias BOP crisis
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The balance of payments of a country is a systematic record of all economic transactionsbetween the residents of a country and the rest of
the world. It presents a classified record of all
receipts on account of goods exported, servicesrendered and capital received by residents andpayments made by them on account of goods
imported and services received and capital
transferred to non-residents or foreigners.
Reserve Bank of India
Balance of payments (BOP)
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Current Account
Import and Export of goods
Import and Export of services
Unilateral transfers from one country to another
Capital Account
Foreign Investment
FDI & portfolio Investment
Loans Commercial Borrowings, External Assistance & Banking Capital
Transactions
Components of BoP
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Current Account Balance =
Balance of Visible Trade(goods) +Balance of Invisible Trade(services) +Balance of Unilateral transfers
Capital Account Balance =Inflow of foreign exchange outflow of foreign exchange
Official Reserves:The holdings of foreign reserves and gold by official
institutions like the central bankOverall Balance of Payment =
Current Account Balance+ Capital account balance+
Official Reserve Account
Overall Balance of payments
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Overview of Macroeconomic and Monetary situations ofthe economy
Study on prospects of direct investment to the nation
Implications on the exchange rate of the currency
Provides data for economic analysis
Reveals changes in the composition & magnitude of foreigntrade
Provides indications of future repercussions of countryspast trade performances
Reveals the weak and strong points of a countrys foreigntrade relations
Uses of BoP Analysis
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Economic factors Huge development expenditure owing to which there are large scale
imports
Business cycles in terms of recession, depression, recovery and boom
High rate of inflation running up to large scale imports of essential goods
Decline of import substitutes which would necessitate and increase inimports
Change in cost structure of trading partners
Political factors Political Instability leading to decline in FDI and FII
Populism policies which may encourage imports
Social factors Change in tastes and preferences leading to demand changes
Cross border prejudices which may lead to expensive sources of imports
BoP crisis- Factors and causes
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Pre-CRISIS PERIOD
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GDP growth rate: 5.5 % (3.3% on a per capitabasis)
Industrial Growth : 6.6%
Agriculture: 3.6%
Investments went from nearly 19% of GDP from
to 1970s to 25% by end on 1980s
Composition was predominantly primary sectorwhich accounted for 32.8% of the GDP
Economic Indicators-pre Crisis period
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Protectionist Policies- defined objective of self reliance throughindustrialization and import substitution
Focus was on substituting imports and promoting domestic industries byheavy intervention while a gross negligence on exports
External Debt- The development projects caused a large scale foreignborrowing which created pressure on the government
Economic Policies
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Export promotion- Indian exports were largely
dependent on world trade situation due to
predominance of primary goods in trade mix
combined with lower quality standards.
Exchange rate- Fixed exchange rate was followed andconstant devaluations by the central bank to promote
exports raised the amount of external debt.Strong inward looking policy in all
Economic policies
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Government Deficit and Current Account- Pre 1991 levels
R l d N i l E h t
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Real and Nominal Exchange ratesPre 1991 levels
l b d
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External Debt and For-ex reserves-
Pre 1991 levels
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Capital inflows mainly consisted of aid flows,
commercial deposits and Non resident Indian
deposits
FDI was heavily restricted and foreign portfolio
investments generally channelized to public sector
issued bonds
Gradual loss of for-ex reserves and deterioration oftrade balance due to fixed nominal exchange rate
which was declining over the 1980s
Trends in Pre BOP crisis period
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Trends in For-ex reserves-Figures
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Sharp rise in imports due to growth orientation and (
petroleum imports rose by 40% from 1986-87 to1989-90 )
Doubling of external debt from 1984-85 ($35 bn) to1990-91 ($69 bn)
Loss of investor confidence led to outflows being
increasingly dependent on short term external debts.An unstable government and the gulf crisis furtheraggravated the situation
Trends contd
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Trends in trade deficit-Figures
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High revenue deficits especially after 1986, for which thegovernment responded by creating a surplus capital accountto finance them
Trends.contd
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THE CRISIS
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Also known as the Unfortunate period of IndianEconomy.
Gulf crisis of 1990 increase in oil import bill
Deterioration of invisible account
Increase in price of oil => overall current
account deficit in 1990-91 : US $ 9.7 billion
Important trading partners like US, Russia turnedup to invest in India
Export growth reduced to 4%
Balance of payments: The Crisis
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World growth declined from 4.5% in 1988 to 2.5%in 1991
Political turmoil VP Singh government
overthrown, Rajiv Gandhi assassination reducedcredibility of India, investors lost interest andtrust in Indias government.
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Foreign reserves very low at $1.2 billion
Overshot IMF SDR reserves
Simultaneous outflow of NRI deposits
Serious difficulties in rolling over of short term
loans
Current account deficit of $9.7 billion almost
impossible to finance
Balance of payments: The Unbalance
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Current account deficit averaging 2.2% of the GDP hithard by the Gulf war
Triggers
oil bill increased by $2 billion
overseas markets for exports shrinked (West Asia, SovietUnion)
Fall in remittances
The Reserve Position in IMF of $660 million was drawn infull by September, 1990 to add to the reserves
The international credit rating agencies placed India onthe watch list in August 1990
Developments in 1991
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Curb imports to reduce deficit Surcharge on oil imports
Cash margin
Import compression
-20
-10
0
10
20
30
1989-90 1990-91 Apr-Sep 1991%change
Import Trends
Bulk imports
Capital goods
Export related imports
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-50
-40
-30
-20
-10
0
10
20
30
40
%c
hange
IIP and Imports
IIP
Non -oil Imports
Import compression effects
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Agreement with IMF for a drawing of $1,025 billionunder its Compensatory and Contingency FinancingFacility (CCFF)
Drawings of $789 million from the first credit tranchemade in Jan,1991
Despite the drawings, the situation was hardly undercontrol.
Between March 1991 and June 1991, there was a sharpwithdrawal of non-resident deposits to the extent of$952 million leading to further drop in foreign exchangereserves
What actually happened..
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Despite low trade deficit ,the slide in foreign reservescontinued unabated
Essentially became a crisis of confidence
The Crisis
expected
devaluation
paymentsof imports& exports
withdrawalby
foreigners
Furtherdrop in
reserves
Expectatio
n of default
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Foreign exchange reserves fell below $1 b
Barely enough to cover 2 weeks of imports
Likely ramifications
The Crisis (Contd.)
Credit unavailability, tradedisruption
Shortages, industrydislocation ,unemployment
High inflation , instability
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Foreign exchange reserves
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As a first step, in May 1991, the governmentleased 20 tonnes of confiscated gold to the StateBank of India for $200 million
Later, RBI moved in four installments 47 tonnes ofthe gold held by it to the vaults of the Bank ofEngland to raise a temporary loan of $405 million
jointly from the Bank of England and the Bank of
JapanLoan repaid in Sep-Nov. and the pledged gold
was redeemed
New government assumed charge in June ,1991
The response
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Two-step downward adjustment in the exchange rate ofrupee was effected on July 1 and 3, 1991
This effectively translated into devaluation of 18-19 percent against major international currencies
This was coupled with the liberalisation of the traderegime and lower import tariffs
Besides exceptional financing arrangements with the
World Bank, Asian Development Bank and a few industrialcountries were also negotiated
Due to the currency devaluation the Rupee fell from 17.50per dollar in 1991 to 26 per dollar in 1992
Short term Structural changes
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A High Level Committee on Balance of Paymentswas set up in December 1991
Liberalized Exchange Rate Management System
(LERMS) and move to a single market basedexchange rate system
This obviates the need for the RBI to determine
the rate daily
However, the need to monitor and watch themovements in the markets assumes importance,
as foreign exchange markets tend to overshoot
often
Long term Structural changes
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Macroeconomic stabilization on four fronts tobasically improve efficiency and spur exports
Fiscal correction lowering of government
spendingTrade policy reforms eximscrips
Industrial policy reforms end of license raj
Public sector reforms autonomy and efficiency
Long term Structural changes (Contd.)
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REFORMS &
IMPACTS
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Rebalancing by changing the exchange rate
An upwards shift in the value of domesticcurrency relative to others will make exports less
competitive and make imports cheaper and willtend to correct a current account surplus.
Exchange rates can be adjusted by government in
a rules based or managed currency regime, and
when left to float freely in the market they alsotend to change in the direction that will restore
balance
Balancing mechanism
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Government allowed Reserve Bank of India toship 47 tonnes of Gold to the Bank of England inJuly 1991.
Short-term debt was reduced and strict controlsput in place to prevent future expansion
Foreign exchange reserves were consciously
accumulated to provide greater insurance against
external sector stresses and uncertainties
Balance of Payments: Policies
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Fiscal Correction:
Abolishing export subsidies, increasing fertilizerprices, as well as by keeping non- plan
expenditure in check.
Budget projected a sharp decline in the budgetdeficit to Rs.7719 crore in 1991-92.
Fiscal deficit was also projected to decline from
Rs 43,331 crore in 1990-91 to Rs 37, 772 crore in1991-92.
Reforms Undertaken
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Industrial Policy Reforms:
80 % of the industries were taken out from thelicensing framework.
MRTP Act was amended to eliminate the need forprior approval by large companies for capacityexpansion or diversification.
Areas reserved for public sector was narrowed
down and greater participation was permittedfrom the private sector.
Reforms Undertaken
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The limit of foreign equity holders was raisedfrom 40 to 51 % in the wide range of priorityindustries.
Technology imports for priority industries areautomatically approved for royalty paymentsupto 5 % of domestic sales and 8 % of export
sales or for lumpsum payments of Rs 1 Crore.
Reforms Undertaken
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Results of Industrial Reforms:
The number of investment approvals rise from3335 in 1990 to 5538 in 1991.
505 foreign technology import agreements werealso approved.
In 1991, a total of 244 cases of foreign equity
participation with the proposed equity
investment of $ 504 million was approved.
Reforms Undertaken
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Public Sector Reforms:
Government undertook a limited disinvestmentof a part of public sector equity to the public
through financial institutions and mutual funds in
order to raise non- inflationary finance fordevelopment.
Sick Industrial Companies Act: To Bring public
sector undertakings also in purview.
Reforms Undertaken
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Trade Policy Reforms:
Large part of administered licensing of importswas replaced by import entitlements linked to
export earnings.
Advance licensing system for exports wassimplified so as to improve exporters access to
imported inputs at duty- free rates.
Scope of canalization for both exports andimports was narrowed.
Reforms Undertaken
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Anti-export bias in the trade and paymentsregime was also reduced substantially
Effects of these reforms was to reduce the degree
of licensing in import trade, to broaden, toenhance and harmonize export initiatives.
Reforms Undertaken
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Foreign exchange reserves had been build up torespectable level of $5.63 billion from a low of$1.29 billion at the end of July 2001.
Introduction to LERMS( Liberalized exchange ratemanagement system)
Mobilization of external assistance from IMF,
World Bank , ADB and Bilateral donors to support
the BOP
Balance of Payments: 1992-93
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Introduced, from March 1992, a dual exchangerate system in the place of a single official rate.
One official rate for select government and
private transactions and the market-determinedrate for the others.
Treated current and capital transactions in
different ways.
Decision to permit gold imports was linked toLERMS
LERMS
Contd
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Despite the increase in imports to more normallevels during 1992-93, it has been possible tomanage the BOP with the stable exchange rate
and comfortable foreign exchange reserves
throughout the year.
Contd..
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BOP Surplus: External sector - growth rates moving up to 11 and 20%
in the two years ended March 2001
India successfully withstood the sharp rise in
international oil prices since the closing months of 1999. NRI deposits with the banking system in India on the rise
from 13 billion dollars in 1991-92 to 23.8 billion dollars byMarch 2001
BOP recorded an overall surplus consecutively for fiveyears from 1996-97
Indias foreign exchange reserves, 1 billion in 1990reached $ 40 billion the average annual addition being
4.5 billion dollars
Effects of L iberal ization
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Trade and Investments:
Rise in FDIs and other capital flows
Under the category of Invisibles, a significant increase in
private transfers.
Private transfers grew to a level of 10-12 billion dollars in the
latter half of 1990s.
Increase in exports level and exchange rate reforms : the
major factors that helped contain the current account deficit
in BOP to 1 to 1.5 per cent of GDP between 1991 and 2001 In ten years, 1991- 2001,
Over 37 billion dollars of foreign investment flowed
18 billion $ was direct investment.
Effects of L iberal ization
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Acceleration of GDP growth to 6.7 per cent in the period1992-97 was the highest India had ever achieved over afive year period.
Sum of external current payments and receipts as a ratioto gross domestic product (GDP) doubled from about 19%in 199091 to around 40% by March 2001
Manufacturing achieved average real growth of 11.3 percent in the four years 1993-94 to 1996-97
Export growth in dollar terms averaged 20 per cent in thethree years 1994 1996 and the rates of aggregatesavings and investment in the economy peaked in 1995-96
Developments in the next decade
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Private Investments showed an high growth of 16.34 %per annum during 1992-96.
Real fixed investment rose by nearly 40 %, led by a morethan 50 % increase in industrial investment
Developments in the next decade
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-10 0 10 20 30 40 50
1980-81
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
10.9
25.2
48.1
20.1
36.7
31.8
26.8
30.6
-8.4
9.1
13.6
21
10.6
ECB/TC (%)
1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97
External Commercial Borrowings
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Result of a concious government policy tomaintain a strict control over external indebtnessand resulted favourably in improving the creditrating of India by international agencies.
Some private sector power and petroleumcompanies finalizing their financing packages
Large demand for borrowing with projects inpetroleum, oil exploration andtelecommunications.
External Commercial Borrowings
1993-94:
1994-95:
1995-96:
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0
10
20
30
40
50
60
70
1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97
60.9
36.234.6
46.9
36.733.2
26.3
63.9
43.7
18.5 19
29.8
11.7
EXTERNAL ASSISTANCE/TC (%)
1980-81 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97
External Assistance
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PMU : Project Management Unit wasintroduced,as part of the department ofEconomic Affairs to monitor ,supervise and
strengthen various projects.
In 1994-95 decided not to approach IMF formedium term funds.
Advance release of funds to state governments
Developments in the decade
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9
20.2 20.3
5.64.5
-3.9
11.6
20.4
-10
-5
0
5
10
15
20
25
1990-91 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00
AxisTitle
EXPORT GROWTH (%)
Export Growth
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Decline in world trade since the second half of1997
Decline in export prices of some major items of
manufactured goodsGrowing infrastructure bottlenecks
Appreciation of the rupee in real effective
exchange rate terms.
Decline of Growth in 1997
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14.4
10
21.6
12.1
4.6
-7.1
16.5
-10
-5
0
5
10
15
20
25
1990-91 1993-94 1995-96 1996-97 1997-98 1998-99 1999-00
AxisTitle
GROWTH OF IMPORTS (%)
Growth of Imports
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References