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Trends in Balance of Payments in India

On account of invisible remittances (i.e. money sent by foreign worker to his home country) had created an export surplus during the 5th plan but the deficit in BOP increased soon after that. India’s BOP position has mostly been unfavourable. From 1979-80 onwards, India had adverse BOP position due to growing trade deficits. In order to meet this huge deficit in the current account, India resorted to withdrawals and borrowings from IMF, apart from external assistance. India had to also use a part of its foreign exchange reserves. The BOP position in the 6th plan can be characterised as ‘acute’. The current account deficit was 1.4% of the GDP. During the 7th plan, the share of net invisible earnings in financing trade deficit declined from 63% during the 6th plan to 29.5%. The average current account deficit as a per cent of GDP increased to 2.4%. During the 7th plan, current account deficit was financed by substantial inflow of capital in the form of loans, commercial borrowings and inflow of funds from NRIs. In 1990-91, BOP position worsened further because of Gulf war and further deterioration in invisible remittances. In 1993-94, India saw are evolution from a foreign exchange constrained control regime to a more open, market driven and liberalised economy. The trade liberalisation and a shift to a market-determined exchange rate regime had a positive impact on the country’s BOP position. The BOP situation remained comfortable in 1995-96, 1996-97 and 1997-98. (The improvement in current account deficit was made possible largely because of the dynamism in export performance, sustained buoyancy in invisible receipts and subdued non-oil export demand).
In the 10th plan
  • Total exports grew at about 24% per annum
  • Manufactured goods recorded a growth of about 20% p.a.
  • Exports of agriculture and allied products also grew at a rate of 16%
  • 16% of India’s exports went to North America and European Union countries had a combined share of at least 21% in India’s exports (See chart 1)
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  • Imports compounded an annual growth of around 30%
  • Crude oil and petroleum products were the single most important category of imports at around 30%
  • The share of machinery and project goods increased from 11.3% in 2002-03 to 18% in 2006-07 (See chart 2)
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  • Asian countries remained as our main suppliers of imports and their share increased from 30% during 2002- 03 to more than 57% in 2006-07
  • On account of growing oil import bill, Merchandise trade deficit had widened sharply.
Table 1 depicting India’s current account deficit between the years 2004-2011
Current account deficit
In the 11th plan
  • Exports are projected to grow at about 20% per year in USD terms
  • Imports are projected to grow at about 23% per year
  • Current account deficit could range between 1.2 to 2%
  • Trade deficit could reach 16% at the end of the plan
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During the first year of the 11th plan:
  • Export increased by around 30%
  • Imports increased by 35%
  • Current account balance was -1.3% of GDP
  • Trade balance was -7.8% of GDP
The year 2008-09 was marked by adverse development in the external sector of the economy reflecting the impact of global financial crisis. Exports grew by 13.7% and imports by 20% during 2008-09. The current account deficit ratio to GDP reached 2.3% during 2008-09. (See chart 3)
Though India’s export growth decelerated in 2011-12 to 21% it was still higher than the compound annual growth of 20.3% for the period of 2004-12. Import recorded a growth of 32% in 2011-12. Moderate export growth coupled with high import growth led to highest ever trade definit in India, i.e., 4.2% of GDP.
Foreign Direct Investment (FDI) growth rate was 154% (net) in 2006-07 and 100% (net) in 2007-08. During 2008-09 net FDI remained buoyant at US $ 22 billion. (Considering global FDI inflows in various countries, India ranked 9th) Foreign exchange reserves were US $ 294 billion at the end of March 2012.
Now, Asia and ASEAN continued to be the major source of India’s imports accounting for more than 60% of total imports. Thus, we find that India’s BOP position has significantly improved since the economic crisis in 1991. We find that:
  • Exports grew at an annual average rate of 7.6% during 1980 to 1992 and at an annual average rate of 10% during 1992-93 to 2000-01
  • Imports grew at 13.7% p.sa. during 1992-93 to 2000-01 when compared to 8.5% growth rate during 1980-1992
  • Current account deficit, as a percentage of GDP, declined from 1.9% during pre-crisis period to around 1% during post-crisis period and during 2001-04, we even had a surplus in the current account
India’s merchandise exports posted a decline of 3.5% during 2009-10 and imports declined by 2.6%. In 2010-11, exports increased by 40% and imports increased by 28% over the previous year. The trade deficit at 5.7 % of GDP in 2010-11 became one of the highest in the world.

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