The document discusses India's balance of payments from pre-1991 to post-reform periods. It notes that pre-1991 saw persistent balance of payments deficits due to large-scale machinery imports to develop basic industries and rising oil prices. 1976-80 was a brief surplus period due to worker remittances and export growth. 1980-91 saw severe deficits exceeding $16 billion by 1991. Post-1991 reforms led to surpluses due to invisibles earnings, external borrowings, and foreign investment.

1. India’s Balance of Payments
GROUP MEMBER’S -SANDIP SHAH
- KANCHAN KUMAR
- RISHABH SHARMA

2. The Balance of Payments of a country is a systematic
record of all economic transactions between the
‘residents’ of a country and the rest of the world
carried out in a specified period of time.
-- Receipts on A/C of : - Goods Exported
- Services Rendered
- Capital received by residents
-- Payments made on A/C of : - Goods Imported
- Services Received
- Capital transfer to non-resident
or foreigners

3. BALANCE OF PAYMENT
CURRENT A/C CAPITAL A/C
OMISSON AND
ERRORS
MERCHANDISE
UNILATERAL AND
UNREQUITED
TRANSFER
NON MONETARY
GOLD MOVEMENT
INVISIBLES
BORROWING TO AND FROM
ABROAD
INVESTMENT TO AND FROM
ABROAD
CHANGE IN FOREIGN
EXCHANGE RESERVE

5. Favorable Balance of Payment = Receipts – Payments > 0
Unfavorable Balance of Payment= Receipts-Payment < 0
Equilibrium Balance of Payment= Receipts =0
Bf =R-P > 0
Bu= R-P< 0
B = R-P =0

6. India’s Balance of Payment: THE PRE 1991 PERIOD
• The Balance of Payments situation was satisfactory in the First
Plan as the deficit in current account was Rs. 42.3 crore.
Bimal Jalan classified has classified pre-1991 into
3 PERIODS
PERIOD-1
1956-57 to
1975-76
PERIOD-2
1976-77 to 1979-80,
There was a surplus on current
a/c which stood 0.6% of GDP.
PERIOD-3
1980-81 to
1990-91
OVERALL BALANCE OF PAYMENT
CONTINUED TO BE DIFFICULT IN
THESE TWO PERIODS.

7. PERIOD – 1
SECOND PLAN :
- Objective is to gave primary importance to the establishment and
development of basic capital goods industries.
• This necessitated large scale import of capital equipments like
machinery, technical know-how.
• Export become stagnant and value of import twice the value
of export.
• As a result balance of trade deficit Rs2,613.3 crore and
current a/c was reduced to Rs1,646.(receipts of invisible still
positive).
THIRD PLAN :
The overall balance of payment deficit rose to Rs1972
crore.(increase by 326)

8. FORTH PLAN :
It register in continuous increase in import mainly due to increase in
international price.
OPEC (Organization of Petroleum Exporting Countries) raised
price of crude oil per/barrel from $2.50 to $3.00 in middle of
1973 to $11.65 per/barrel in early 1974.
Price increase by 4 times.
Deficit in current a/c during 4th plan was as high Rs 2,221 crore.
FIFTH PLAN :
The first 2 years of 5th plan (1974-75 to 1975-76) recorded a
deficit of Rs. 1,738 crore in current a/c.

9. PERIOD -2 (from 1976-77 to 1979-80)
This brief 4 year period was GOLDEN PERIOD
• India had a small current a/c surplus of 0.6% during the
period and foreign exchange reserves equivalent to 7 month’s
import.
Comfortable Balance of Payment due to following factors are:-
- First and foremost rapid increase in private remittances from
oil exporting countries.
A large number of Indian workers temporarily migrated to the
oil richer middle east countries to work their as:-
unskilled workers, skilled technicians, office assistance and
nurses etc. (they send their Net Earnings to their families in
India)

10. - There was a strong growth of exports nearly
31% In 1975-76 over 1974-75.
-There was substantial expansion in the activities of Indian firms in
the oil exporting middle east countries. Indian firms were building
roads, airport, housing estates, power stations and steel mills etc.
-Aid receipts were reasonably buoyant and India drew various IMF
facilities during the year 1973-74 to 1975-76.

11. PERIOD-3 (1980-81 to 1990-91)
• The period covering roughly the 6th plan (1980-81 to 1984-85)
and 7th plan (1985-86 to 1989-90) was marked by severe
Balance of Payment difficulties.
• During first 4 years of 6th plan, the deficit in balance of trade
was around Rs 6,000 crore per annum. In last year plan, this
shot up to Rs 6,721 crore.
• The trade deficit in the first 3 years of 7th plan (1985-86 to
1987-88) exceeded Rs 9,000 crore per annum. And in 4th and
5th years (1988-89 t0 1989-90) exceeded Rs 12,000 crore per
year.
• In 1990-91 the deficit touch astronomical figure of Rs. 16,934
crore.
• The current a/c deficit soared to Rs 17,369 crore.

12. ISSUE RELATED TO MANAGEMENT OF BALANCE OF
PAYMENT
• Issue related to Trade strategy ( The Trade Policy Related
Debate
OUTWARD ORIENTED is one in which the trade and industrial policies do not
discriminate between production for domestic goods and foreign goods.
INWARD ORIENTED strategy is one in which trade and industrial incentives
are biased in favor of domestic market over the export market.
TRADE STRATEGY
OUTWARD
ORIENTED
INWARD
ORIENTED

13. Import substitution Policy in India: Constraint to
Growth
• India opted for strongly inward oriented strategy in early
decades of economic planning
• Basic rationale to opt strategy was that it would help rapid
industrialization through import substitution and save
valuable foreign exchange.
• A no. of economist studies conducted all over the world that
outward oriented have performed better while inward
oriented constraint growth.
• World Development Report 1987 conducted a study of 41
countries which shows outward oriented economies
performed better than inward oriented in all respect.
• Their growth rate of GDP is 7.7 percent in the period of 1973-
85.

14. 1991 economic crises: the causes of balance of payment crises-
• Iraq-Kuwait War: The Gulf crisis began with the invasion of Kuwait
by Iraq at the beginning of August 1990. Crude oil prices rose
rapidly thereafter–from USD 15 per barrel in July 1990 to USD 35
per barrel in October 1990.
• Slow Growth of Important Trading Partners: The deterioration of
the current account was also induced by slow growth in economies
of important trading partners. Export markets were weak in the
period leading up to India’s crisis, as the world growth declined
steadily from 4.5 percent in 1988 to 2.25 percent in 1991.
• Political Uncertainty and Instability: The period from November
1989 to May 1991 was marked with political uncertainty and
instability in India. In fact, within a span of one and half years there
were three coalition governments and three Prime Ministers. This
led to delay in tackling the ongoing balance of payment crisis, and
also led to a loss of investor confidence.

15. Fiscal Indiscipline: The Economic Survey (1991-92) had
categorically remarked that:
“Throughout the eighties, all the important indicators of fiscal
imbalances were on the rise. These were the conventional
budgetary deficit, the revenue deficit, the monetized deficit and
gross fiscal deficit.
• Loss of Investors’ Confidence: The widening current account
deficits and reserve losses contributed to low investor
confidence, which was further weakened by political
uncertainty. This was aggravated by the downgrade of India’s
credit rating by credit rating agencies.

16. India’s Balance of Payments
• India’s CAB has been negative from the days of independence
except some years, and this has posed persistent problem in
the maintenance of external balance. From 1991-92, it has
shown increasing trend up to the year 2012-13.
• The year 2011-12, India’s overall external sector balance has
been in surplus, and boosted the international reserves of the
country. This has been achieved through generating surplus in
the capital account of BoP

18. Reasons for satisfactory balance of
payments situation post – reform
period
• High earnings from invisibles
• Rise in external commercial borrowings
• Non- resident deposits
• Role of foreign investment

19. CAUSES OF UNFAVOURABLE BoP
-Import of Machinery- to meet the need of industrialization India
import machinery on large scale. India import machinery from
America, England, Germany, Japan and Russia.
- Import of War Equipments- India has top in list of largest weapons
importing country in the world, accounting 14% of global imports.
Russia supplied -70%
USA- 12%
Israel- 7%
-Foreign Competition in Export: India mainly exporter of Tea, Jute and
Textile in tea Bangladesh is a big rival of India, in jute Srilanka and
Israel are big rival of India and in textile and cloths Pakistan,
Bangladesh and Srilanka.

20. -Poor quality of Industrial Production: Back ward technology
cause impediment and hindrance Indian traders to export.
- Population Growth: India’s population
increase by faster pace to meet their needs,
imports become essential.
- Natural Factors
- Demonstration Effect
- Negative Impact in Dollar Depreciation and
Rupee appreciation on exports

21. Meaning of currency convertible
- Let us first explain what is exactly meant by currency convertibility.
By convertibility of a currency we mean currency of a country can
be freely converted into foreign exchange at market determined
rate of exchange that is, exchange rate as determined by demand
for and supply of a currency.
- The exporters and others who receive US dollars, Pound Sterling
etc. can go to these dealers which are generally banks and get their
dollars exchanged for rupees at the market determined rates of
exchange. Similarly, under currency convertibility, importers and
other who require foreign exchange can go to these banks dealing
in foreign exchange and get rupees converted into foreign
exchange.
• A currency may be convertible on current account (that is, exports
and imports of merchandise and invisibles) only.

22. Capital account transaction means cross border transactions
in assets
Assets mean : Stocks, Bonds (or other debt instruments), Property, or mixture
of these three
Full capital account convertibility means :
1) A foreign investor (person or institution) can convert foreign currency to
Indian Rupee and invest in any asset in India without any restriction. This
investor is also able to sell the investment without any restriction, convert
the resulting Indian Rupee amount to a foreign currency and take it out of
the country.
2) A domestic investor (person or institution) can convert Indian Rupee to
foreign currency and invest in any asset abroad without any restriction.
A domestic investor can also sell investments abroad and bring the
proceeds back into India.

23. Convertibility of Indian Rupee:
• In the seventies and eighties many countries switched
over to the free convertibility of their currencies into
foreign exchange. By 1990, 70 countries of the world had
introduced currency convertibility on current account;
another 10 countries joined them in 1991.
• As a part of new economic reforms initiated in 1991
rupee was made partly convertible from March 1992
under the “Liberalized Exchange Rate Management
scheme in which 60 per cent of all receipts on current
account (i.e., merchandise exports and invisible receipts)
could be converted freely into rupees at market
determined exchange rate quoted by authorized dealers,
while 40 per cent of them was to be surrendered to
Reserve Bank of India at the officially fixed exchange rate.

24. To be cont’d
• This partial convertibility of rupee on current account
was adopted so that essential imports could be made
available at lower exchange rate to ensure that their
prices do not rise much. Further, full convertibility of
rupees at that stage was considered to be risky in view
of large deficit in balance of payments on current
account.
• As even after partial convertibility of rupee foreign
exchange value of rupee remained stable, full
convertibility on current account was announced in the
budget for 1993-94. From March 1993, rupee was
made convertible for all trade in merchandise.

25. Advantages of Currency Convertibility:
• 1. Encouragement to exports:
An important advantage of currency convertibility is that it
encourages exports by increasing their profitability. With
convertibility profitability of exports increases because market
foreign exchange rate is higher than the previous officially fixed
exchange rate. This implies that from given exports, exporters can
get more rupees against foreign exchange (e.g. US dollars) earned
from exports.
• 2. Encouragement to import substitution:
Since free or market determined exchange rate is higher than
the previous officially fixed exchange rate, imports become
more expensive after convertibility of a currency. This
discourages imports and gives boost to import substitution.

26. • 3. Incentive to send remittances from abroad:
Thirdly, rupee convertibility provided greater incentives to send
remittances of foreign exchange by Indian workers living abroad
and by NRI.
• Integration of World Economy:
Finally, currency convertibility gives boost to the integration of
the world economy. As under currency convertibility there is
easy access to foreign exchange, it greatly helps the growth of
trade and capital flows between the countries. The expansion
in trade and capital flows between countries will ensure rapid
economic growth in the economies of the world.
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