BALANCE OF PAYMENT

INDIAN CRISIS 1990

WHAT IS BALANCE OF PAYMENT ?

A BoP is a double entry system of record of all economic transactions between the residents of a country and the rest of the world carried out in a specific period of time.

In other words BoP means the exports & imports of all

kinds including consumer goods, consumer durables, FMCG, capital goods, technical equipment & services like banking, insurance, tourism, transportation etc. and payment of salaries, benefits, interest, dividents etc……

DEFICITS IN BoP

• There was a deficit in BoP from the 1st five yr plan (19951-56) onwards

• At that time deficit is

BoP CRISIS IN 1990

• The deficit problem is a long-standing one, it took on a serious turn in the early 1990’s and continues to be a difficult one at present, although there is some easing of the situation.

FACTORS CONTRIBUTING BoP CRISIS

• LARGE IMBALANCES The continuing deficits become massive around

the second half of 1990. Because,• Gulf crisis• Rise in the value of imports of oil greatly

expanded the size of deficit. From an avg of Rs499 cr ($ 287 m) pre month in June-Aug 1990, the value of importsrose massively to Rs 1221 cr ($ 671 m) per month in the following six months.

• This in turn largely accounted for a doubling of the BoP deficit from an avg of Rs 619cr ($ 356 m) per month in June-Aug 1990 to Rs.1229 cr ($ 679 m) per month in the six months followed.

• Indian workers employed in Kuwait had to be airlifted to India.

• UN trade embargo exports to Iraq & Kuwait.

• LOSS OF CONFIDENCE• Outside world had lost confidence in the

country’s ability to manage the crisis. There was an expectation that the country would default on its debts. And that the Rupee would fall heavily in the world mkt.

• There was a drying up of short-term credits from a level of about $ 2 billion in 1989-90 to over a half billion in 1990-91. The interest on these credits too went up sharply.

• BIG SIZE• One reason why the problem is a serious one, is that

the deficit in the trade balance is a big figure. An indication of the same can be had by relating it to GDP. As a proportion of GDP, it has remained as high as around 3% for most of the yrs. This is larger than the projections in several plans. This is only a reflection of the low performance of the exports, which is a proportion of GDP remained small in the range of 5 to 8% of GDP on an avg basis. As against this imports exceeded exports by a wide range of 8 to 12% of GDP.

• STRAINS ON FORIGN EXCHANGE RESOURCES• These reserves are comprised of forign

currency assets of the RBI, gold holding of RBI and special drawing rights(SDR) of the IMF. These reserves are maximum that the country can draw upon freely. However there are limits beyond which these cannot be drawn.

• LARGE INCREASE IN DEBT BURDEN• The country have heavy burden of return of

the loans & payment of interest. The loans drawn from various sources like IMF cerdits, commercial borrowings & supplier’s credits. The total external debt was $ 23.5 bn in 1980-81. This increased by over four times to $ 99.6 bn in 2001.

MEASURES TO CONTROL BoP

• IMPORT CONTROL• EXPORT PROMOTION• ATTRACTION OF NRI DEPOSITS• LIBERALISED EXCHANGE RATE MGT SYSTEM• UNIFIED EXCHANGE RATE• CURRENT ACCOUNT CONVRTABILITY

• THANK YOUUUUUUUU