TRENDS IN INDIAS BALANCE OF PAYMENT (BOP) SINCE 1991

Balance of Payments
1.1) Definition
Balance of payments is an accounting record of all monetary transactions of a country with rest
of the world which includes payments for exports and imports of goods, services, capital and
financial transfers for a specific period, usually a year, and is prepared in a single currency,
typically the domestic currency for the country concerned. The transactions are presented in the
form of double-entry book keeping.
Reserve Bank of India defines Balance of payment as
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. It presents a classified record of all
receipts on account of goods exported, services rendered and capital received by residents and
payments made by them on account of goods imported and services received and capital
transferred to non-residents or foreigners.

1.2) Deficits & Surplus

Exports and receipts of loans and investments are recorded as surplus items. Imports or funds
used to invest in foreign countries are recorded as deficit items. Generally surplus is recorded as
positive and deficit is expressed as negative. A negative balance of payments means that more
money is flowing out of the country than coming in, and vice versa.
A BOP surplus means a nation has more funds coming in than it pays out to other countries from
trade and investments, which results in appreciation of its national currency versus currencies of
other nations. A deficit in the balance of payments has the opposite effect: an excess of imports
over exports, a dependence on foreign investors, and an overvalued currency. Countries
experiencing a payments deficit must make up the difference by exporting gold or Hard

Currency reserves, such as the U.S. Dollar, that are accepted currencies for settlement of
international debts.

1.3) Types of Accounts

The balance of payments for any country is divided into two broad categories:

The Current Account: It reports the various trades in import and export plus income
derived from tourism, profits earned overseas, and payments of interest

The capital account: It reports sum of bank deposits, private investments and debt
securities sold by a central bank or official government agencies.

The official reserve account: It is a subdivision of the capital account which contains
foreign currency and securities held by the government or the central bank, which is used
to balance the payments from year to year. It is known as the balancing item and can be
considered a "plug factor" for summing the balance of payments accounts to zero.

Overall balance of payment = Current Account Balance+ Capital account balance+ Official
Reserve Account

1.4) Uses :

BoP data gives a comprehensive overview of the macro-economic and monetary situation
of national economy and is very vital for monetary and financial monitoring purposes for
policy deliberations in both the domestic and international contexts. The data provides
objective basis for assessing the macro-economic and monetary situation of an economy.
BoP analysis helps in macro-economic review on the following aspects of an economy :
o income growth
o external orientation
o relationships between trade in goods and services and direct investment flows
o international banking transactions
o assets securitization and financial market developments
o external debt situation

Study on prospects for direct investment. Direct investment income data which is
available in the BoP current account and the economy's stock of direct investment
provides a methodology for analyzing profitability of FDI.

Implications of BoP performance on exchange rate movements. Exchange rate

movements are of concern for traders and investors as they reflect the competitiveness of
the exports of an economy, the changing costs as well as the exchange rate risk associated
with external investment.

1.5) Causes:
A situation where sufficient financing on affordable terms cannot be obtained to meet
international payment obligations causes problems with BoP. If difficulties persist, it may
lead to a crisis. Domestic currency depreciates rapidly, making international goods and
capital expensive and the economy may reach a situation of a stand still. It may spread to
other countries that are tightly linked with the domestic economy.
Key factors are weak domestic financial systems; large and persistent fiscal deficits; high levels
of external and/or public debt; exchange rates fixed at inappropriate levels; natural disasters; or
armed conflicts or a sudden and strong increase in the price of key commodities such as food and
fuel. Some of these factors will reduce exports or/ and increase imports. Others may reduce the
foreign financing available. Also investors may lose confidence in a country's prospects leading
to massive sales of assets, the so called "capital flight." Crises get complicated by inter- linkages
between various sectors of the economy. An imbalance in even one of the sectors will rapidly
spread to other sectors and will lead to culminating in a widespread economic disruption.

1. Indian Economy: Pre-Crisis Period(1980-89)

Indian Economy was in a growth mode in the 1980s. From FY 1980 to FY 1989, the economy
grew at an annual rate of 5.5 percent, or 3.3 percent on a per capita basis. Industry grew at an
annual rate of 6.6 percent and agriculture at a rate of 3.6 percent. A high rate of investment was a
major factor in improved economic growth. Investment went from about 19 percent of GDP in

the early 1970s to nearly 25 percent in the early 1980s. India, however, required a higher rate of
investment to attain comparable economic growth than did most other low-income developing
countries, indicating a lower rate of return on investments.
Private savings financed most of India's investment, but by the mid-1980s further growth in
private savings was difficult because they were already at quite a high level. As a result, during
the late 1980s India relied increasingly on borrowing from foreign countries.

2.1)
i)

Economic Policies during 1980-89

Protectionist Policies:

The Government had a defined objective of attaining self reliance through industrialization, i.e.
Import substitution and export promotion. Basic Industries had to be set up which required
capital goods imports and an enormous amount of funding. The objective of import substitution

was attempted to be realized through various non price, physical interventionist policies like
licensing, quotas, tariffs etc. This actually was only effective in case of substitution of consumer
goods while the capital goods industries were still import intensive. The high degree of
protection to Indian industries actually resulted in shutting off them from competition and thus
poor quality production and inefficiencies were too common. The high cost of production due to
inadequate technical knowhow further aggravated the situation. All this led to an eventual
decline in the exports and a widened trade deficit of the country along with a heavy debt burden.
ii)

External Debt:

India had a very limited resource base due to lower per capita income and savings. The
Government resorted to heavy foreign borrowing for the developmental efforts and also to
correct the BoP situation in the short run. The debt service obligations grew enormously due to
changes in exchange rates and repayments to the IMF along with a loss of credit confidence on
India which led to harder average terms of external debt and fall in concessional aid flow.
iii)

Export promotion:

Indian exports were mainly constituted of primary products, the prices of which fluctuated
heavily with the fluctuations in the global market demand. The earnings from such primary
products were relatively low and the primary product exporting countries were always put in
unfavorable terms of trade. The quality of Indian products was another area of concern due to
which the exports were lagging behind expectations. Further, the licensing and other disruptive
policies were proving cumbersome for exporters and hence dis-incentivised them from export
promotion.
iv)

Exchange Rate:

The instability in exchange rate also posed a great threat to economic stability of India. The
constant devaluations of the rupee increased the amount of external debt. It was also a cause of
concern for the export and import areas, also led to flourishing of hawala trade due to the strict
for-ex controls in the market. The inflation rates remained higher towards the end of the decade
and hence it was imminent on the central bank to change the exchange rates accordingly

2.2) Trends in Indian Economy during 1980-89

i)

Government Deficit:

As its evident from the graph below, the government deficits have shown a steady increase from
the beginning of 1980s and peaks during the 1985-86 period. The further dip in the deficit can be
accounted to the various attempts by the government to monetize the deficit with the help of the
central bank which eventually created a lot of other macroeconomic pressures whose culmination
led to the crisis eventually.

Fig 1.1: Government deficit

The table below shows the buildup of the revenue deficit in the period after 1986 which is
increasing heavily in the years to come. We can see that till 1989, the government attempts to
control the budget deficit but it turns out to shoot up in the post crisis period, i.e. post 1991.

Table 1.1: Revenue deficit and Budget deficit

ii)

Current Account:

The graph below shows the position of the current account in the pre crisis period. We can see
that the current account balance declined sharply during the end of the decade. The imports rose
sharply (for e.g.: the petroleum imports rose by nearly 40% from the period 1986-87 to 1989-90)
and the export growth was very disappointing which led to the widening of the trade deficit and
deterioration if current account balances.

Fig 1.2: Current Account balances

The trade deficits were increasing all through the 1980s as shown in the table below. This
indicated the fact that it was highly imperative to resort to some corrective measures failing
which this would affect the BoP and lead to a crisis in the near future.

Table 1.2: Trade deficits

iii)

Capital Account and For-ex reserves:

The capital inflows to India mainly consisted of aid flows, commercial deposits and deposits
from Non resident Indians. The heavy restriction on FDIs in almost all sectors was a main
limiting factor in the economy to attract enough foreign investments for its development projects
in infrastructure sectors. The only ray of hope came from the provision of Institutional investors,
but their investments too were channelized to a few public sector bonds and literally there were
no investments from abroad in Indias attempt to catch up to the mainstream of the world.

The situation worsened when India was gradually losing out its forex reserves (see table) due to
constant devaluations of the rupee against dollar and widening trade deficit. The forex reserves

fell from a comfortable $8151 mm in 1987 to $ 5331mm in 1990 and further to $ 1877mm by
1991.

Fig 1.3: For- Ex reserves

Table 1.3: For-ex reserves ( figures)

iv)

External Debt

The external debt of India doubled from 1984-85 ($35 bn) to 1990-91 ($69 bn). It is also evident
from the graph below that the external debt kept on rising from the early 1980s towards the end
of the decade. The investor confidence declined rapidly due to the economic situation of India
and hence it resulted in the outflows being increasingly dependent on short term external debts.
The gulf crisis which occurred in the early 1990 along with the existence of an unstable
government at the centre further aggravated the situation. There was increasingly an adverse
impression globally about Indias creditworthiness.

Fig 1.4: External Debt

v)

Exchange Rate

The exchange rates kept on falling owing to the changes in the world market. The world
economy had an increasing effect on Indian currency due to heavy dependence on foreign funds
and capital goods imports. This, as already explained, had many adverse effects including the
multiplying effect on the external debt and trade deficit.
The graphs below show the trends in exchange rates, both real and nominal.

Fig 1.5: Real exchange rates

Fig 1.6: Nominal Exchange rates

2.

Balance of Payments: CRISIS

3.1) The lead up to the crisis: 1990-91

i)

Break up of the Soviet Union

The Soviet Union had been one of the largest export markets for India prior to its breakup in
India. The Soviet breakup therefore negatively affected Indias precarious trade balance, which
slipped further into red.
ii) The Gulf war
Current account deficit averaging 2.2% of the GDP hit hard by the Gulf war .The Gulf war began
in August 1990 with Iraqs Invasion of Kuwait. Both Iraq and Kuwait were among the largest
suppliers of oil to India, especially Iraq with whom India had long term arrangements .Due to the
war many of these long term contracts were hit, which forced the government to buy from the
spot market at high prices resulting in the oil bill ballooning to $2 billion in the latter half of
1990.
iii) Fall in remittances
The Gulf war also caused many Indian workers working in Kuwait and Iraq to return, resulting
in a fall in remittances. This was significant since NRI remittances had been an important source
of inflows to the country throughout the eighties thus reducing the severity of the balance of
payments. The situation was further aggravated further with the government having to airlift
Indian residents in Kuwait.
v)

Political uncertainty

The period between1990-91 was marked with high political uncertainty at the central level with
the country seeing three successive government changes. This reduced the focus of the
government on the looming economic crisis as there was no clear policy to deal with the
unexpected situation. When a stable majority government did was setup in 1991, it was a little
too late as the damage had been done.

3.2) THE CRISIS

The rapid loss of foreign exchange reserves had prompted the government to take steps to reduce
the trade deficit, by restricting the imports .In October 1990; the RBI imposed a cash margin of
25percent on all imports other than capital goods. Capital goods imports were allowed only with
foreign sources of credit. Additionally, a surcharge of 50 percent was imposed on all Petroleum
and oil imports except domestic gas. Along with increases in custom duties, the above mentioned
policies had the desired impact of controlling the imports, which started falling in the latter half
of 1991. By late of 1991, the decline of imports had reached a stage where it was starting to
affect the domestic production, which started declining (as shown). Hence any further measured
in this direction was ruled out.

Fig1.7: Import Trends

Fig1.8: IIP and Imports

By the end of 1990 and the beginning of 1991 it was clear that Trade deficit was not the deciding
factor , as it had come down to $382 million in Jan-Feb 1991 and further to $172 million in May
1991( Source :RBI) 59 76 310 . The main reason for such a drastic fall in reserves was due to
the withdrawal of foreign currency non-resident deposits (FCNR), which accelerated from $59
million in Oct-Dec 1990, to $76 million in Jan-Mar 1991 and finally to 310 million in June 1991.

Fig1.9: Reserves
It was clear that the crisis had been clearly due to crisis of confidence in the Indian Government
to prevent a default. This is more akin to a sort of speculative attack, in which the foreign

investors fearing devaluation of the currency (the most likely step for the government to prevent
a default) withdraw their deposits from the country. Further, in expectation of devaluation import
receipts are forwarded and export receipts are postponed .This together with the downgrading of
credit risk pushes the country more towards the default, with the Central Bank under more
pressure not to devalue the currency. This situation is pictorially depicted below

4. THE RESPONSE
In June 1991, Foreign exchange reserves fell below $1billion. This was barely enough to cover 2
weeks of imports. Further, the short term debt to foreign currency reserve ratio rose from 2.2 in
March 1990 to 3.8 in March 1991 putting extraordinary pressure on the reserves (It should be
noted that this ratio had increased from 0.9 in 1989 to2.2 in 1990 which was a strong
precursor).These short term debts had higher costs and were subject to greater volatility,

subjecting the reserves to greater risks. However, during this time the government took a number
of steps starting with an agreement with IMF for a withdrawal of $1,025 billion under its
Compensatory and Contingency Financing Facility (CCFF).Withdrawals of $789 million from
the first credit tranche made in Jan, 1991. In May 1991, the government leased 20 tones of
confiscated gold to State bank of India to sell it abroad with an option to repurchase it within 6
months. Further in July 1991, the government allowed the RBI to ship 47 tons of Gold to the
Bank of England and Bank of Japan which allowed RBI to raise $600 million. This pledged gold
was later retrieved in September 1991.
It was against this background that a two-step downward adjustment in the exchange rate of
rupee was effected on July 1 and 3, 1991, which resulted in devaluation of around 18 per cent
against major international currencies. Devaluation at no time was free from controversy. But
given the grim situation that the country faced on the external front, a downward adjustment of
the exchange rate had become inevitable. The extent of devaluation was determined primarily by
the

degree

of

correction

that

was

required

in

the

balance

of

payments.

Another consideration was whether, instead of making a discrete change, small changes in the
exchange rate should be made , as had been policy since 1985 . It was decided that a sharp
discrete change was needed to quell expectations. This two-stage discrete devaluation process in
the exchange rate also intrigued many observers. An explanation for this is that it was done
partly to test the waters and gauge the reaction to the first change before making the next. After
the first announcement, to avoid destabilizing expectations, the required change was completed
in

the

second

round.

The devaluation of the rupee was complemented with changes in the external trade regime.
Perhaps this is what made the devaluation of 1991, different from others. A process of
establishing a more liberalized trade regime was set in motion. A realistic exchange rate provided
the basis for a credible reform process.
5. Post Crisis: Reforms
India adopted a more cautious approach to reforms and liberalization than most of the other
emerging economies. The reforms program was undertaken in the face of a balance of payments
crisis which forced the country to seek IMF financial assistance.

To impart inherent competitive strength to the industrial economy, a program of structural

reforms of trade, industrial and public sector policies was also initiated
The objective was to evolve an industrial and trade policy framework would promote efficiency,
reduce bias in favor of excessive capital-intensity and encourage an employment-oriented form
of industrialization.
The four major steps taken by the government to address the balance of payments and structural
rigidities are discussed below:

5.1) Fiscal Correction

The stabilization effort was the effort to restore fiscal discipline. Balance of payments and the
persistent inflationary pressure were the result of large budgetary fiscal deficits year after year.
1) Budget deficit reached Rs. 10,992 crore in 1989-90 and Rs. 10,772 crore in 1990-91
2) Reversal of the trend of fiscal expansion was necessary to restore balance in the
economy
3) Budget projected a sharp decline in the budget deficit to Rs. 7719 corer in 1991-92
4) Fiscal deficit which represents the overall resource gap of the government, projected a
decline from Rs. 43,331 crore in 1990-91 to Rs. 37,772 in 1991-92
These improvements in the fiscal performance was mainly due to the decision to
a) abolish export subsidies
b) to increase fertilizer prices
c) and to keep non-plan expenditure in check

5.2) Trade policy Reforms

New initiatives were undertaken in trade policy that created an environment which would
stimulate the exports and at the same time reduce the degree of regulation and licensing control
on the foreign trade. The exchange rate was adjusted to 18% in the value of the rupee to
stimulate exports
The important trade policies introduced in 1991-92 is.
1) Administered licensing of imports was replaced by import entitlements linked with
export earning

2) Import entitlements renamed as EximScrips, were freely tradeable and attracted a

premium in the market. For exports at a uniform rate if 30% of Eximscrips was made
applicable.
3) The advanced licensing system for exports was simplified so as to improve exporters
access to imported inputs at duty-free rates
4) Permission was granted to import capital goods without clearance from the indigenous
availability angle provided this import was covered by foreign equity or was up to 25%
of the value of plant and machinery, subject to a maximum of Rs. 2 crore
5) Trading houses were permitted a large range of imports including 51% in foreign equity
6) Scope of canalization of both exports and imports was narrowed.

5.3) Industrial Policy Reforms

To provide greater competitive stimulus to the domestic industry, a series of reforms were
introduced in Industrial Policy. This policy reforms should be seen as being complementary to
those undertaken in trade and fiscal policies and in the management of exchange rate and the
financial sector.
The central elements of this reform were as follows:
1) Industrial licensing was abolished for all projects except 18 industries where strategic or
environmental concerns are paramount or where the industries produce goods with
exceptionally high import content.
2) The MRTP Act was amended to eliminate the need for prior approval by large companies
for capacity expansion and diversification
3) Areas reserved for the public sector was narrowed down, and greater participation by
private sector was permitted in core and basic industries.
4) Government clearance for the location of projects was dispensed with except in the case
of 23 cities with a population of more than one million
5) Small scale industries were given an option to offer 24% of their share-holding to large
scale and other industrial undertaking
Along with industrial policy reforms, steps were taken to facilitate the inflow of direct foreign
Investments. The following measures were taken in this context:
1) Limit of foreign equity holdings was raised from 40% to 51% in a wide range of priority.
2) The procedure for investment in non-priority industries have been streamlined
3) Technology imports for priority industries was automatically approved for royalty
payments up to 5% of domestic sales and 8% of export sales or for lump sum payments
of Rs. 1crore

5.4) Public Sector Reforms

To enable the public sector to work efficiently, the public sector units have to be given the
greatest autonomy in their operations. These were the measures undertaken:
1) Government undertook a limited disinvestment of a part of public sector equity to the
public through financial institutions and mutual funds in order to raise non-inflationary
finance for development.
2) Government amended the Sick Industrial Companies Act to bring public sector
undertaking also within its purview.

6. Post Crisis: Impacts

6.1)

Impacts

i)

Balance of Payments: 1992-93

Foreign exchange reserves had been building up to respectable level of $5.63 billion from

a low of $1.29 billion at the end of July 2001.

Introduction to LERMS( Liberalized exchange rate management system)
Mobilization of external assistance from IMF, World Bank , ADB and Bilateral donors to

support the BOP

Despite the increase in imports to more normal levels during 1992-93, it has been
possible to manage the BOP with the stable exchange rate and comfortable foreign
exchange reserves throughout the year.

ii) Introduction to LERMS (Liberalized exchange rate management system)

Liberalized exchange rate management system (LERMS) was introduced in March 1992.As a
result of this system, foreign exchange market in India effectively became a dual exchange rate
system, with a direct exchange rate system in force, one official rate for select government and
private transactions and the market-determined rate for the others. But this system were in
existence for not more than an year, In March 1993 this system was abolished and again single
exchange rate mechanism system came into the market.
Main features of Liberalized Exchange Control Management System are as follows:

The exchange rates of the domestic currency i.e. rupee are determined on the basis of
demand and supply. Free market rates are worked upon by authorized dealers (ADs).

Like any other market prices, the variations between the exchange rates of both types, i.e.
spot and forward can take place within a day or between days or months or on the basis
of terms.

The commercial transactions in Balance of Payments i.e. Current account and capital
account are taken at the free-market driven rates, whether on government account or the
private one.

Full convertibility was not applicable to the invisible trade.

All inward remittances and export proceeds need to be surrendered with a 156% retention
option in a foreign currency account with Authorized dealers.

The medium of currency exchange i.e. intervention currency continued to be U.S. dollar,
which the Reserve Bank can buy and sell .This route was used to provide temporary
stabilization in the exchange markets.

Depending on the market pressure. The 2 way quotes of the US dollar can vary several
times in a day.

The Reserve Bank will not generally buy or sell any other currency, either spot or
forward; rather will take swap transactions with the Authorized dealers. The swap
involves the Reserve Bank by performing exchange i.e. buying the U.S. Dollar spot and
selling forward simultaneously at one time for delivery in two to six months.

The RBI will be selling US Dollars to Authorized dealers at the market rate, for debt
payments on Government Account and other payments.

For performing trade with Russian Republics, where the invoice is in freely convertible
currency the other one i.e. market related exchange rate isapplicable.

Transactions routed through ACU arrangement (except those that were settled in the
Indian rupee) will be based on Reserve Banks rate for ACU currencies and for the AMU
i.e. Asian Monetary Unit.

Treated current and capital transactions in different ways.

Decision to permit gold imports was linked to LERMS

6.2)

i)

Effects of Liberalization:
Balance of Payments Surplus:
a. External sector - growth rates moved 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.
b. NRI deposits with the banking system in India on the rise from 13 billion dollars
in 1991-92 to 23.8 billion dollars by March 2001
c. BOP recorded an overall surplus consecutively for five years from 1996-97
d. Indias foreign exchange reserves, 1 billion in 1990 reached $ 40 billion the
average annual addition being 4.5 billion dollars
e. Net inflow on invisible account has continued to be a major support to the balance
of payments. Invisible receipts have shown extreme growth, reaching US $ 23.0
billion in 1997-98. Private transfer receipts increased by 25 per cent per annum
i.e. from U.S. $ 3.9 billion in 1992-93 to U.S. $ 11.9 billion in 1997-98.
f. Capital account in the balance of payments had shown an impressive surplus of
U.S. $ 10.4 billion in 1997-98. Foreign direct investment (FDI), which had
increased by 18.6 per cent in 1997-98, has fallen by 38 per cent in AprilDecember 1998.
g. Portfolio investment continued to decline from U.S. $ 3.3 billion in 1996-97 to
U.S. $ 1.8 billion in 1997-98, to an outflow of $ 0.7 billion in April-December
1998.The reason behind this decline was result of contagion from the East Asian
crisis that has affected all emerging & developed markets.

h. The Resurgent India Bonds (RIB) scheme launched in 1998 was open to both
NRIs/OCBs. Net inflows under NRI deposits declined from U.S. $ 3.3 billion in
1996-97 to U.S. $ 1.1 billion in 1997-98.
i. External Commercial Borrowing (ECB) has been placed at US $ 3.8 billion
compared to U.S. $ 8.7 billion in 1997-98. Disbursements have declined more
sharply from $ 4 billion in April-September 1997-98 to US $ 1.6 billion in the
first half of 1998-99. The reason was the relative unattractiveness of ECB from
the borrowers perspective.
ii)

Trade and Investments:

a. The trade deficit has increased from 3.7 per cent of GDP in 1996-97 to 3.9 per
cent in 1997-98, despite the sharp decline in import growth. This accounts to
deceleration in export growth, which continued for the third year in succession in
1998-99. Export growth, in BOP terms, slowed from 5.6 per cent in US dollar
terms in 1996-97 to 2.1 per cent in 1997-98
b.

Import growth in the advanced & developed economies, which were Indias
major trading partners has decelerated from 18.2 per cent in 1995 to 3.7 per cent
in 1996 and to 2.5 per cent in 1997.

c. Reduction in the export prices of major items of manufactured goods.

d. Total imports, on BOP basis, increased by 4.4 per cent to US$ 51.1 billion in
1997-98 compared to 12.1 per cent growth in 1996-97, while the non-oil imports,
excluding gold and silver, grew by only 5 per cent in 1997-98.
e. Slowdown in global growth and international trade has led to the introduction of
protectionist measures in some countries.

6.3)

Developments made in the next decade( 1991-2001):

Some of the major developments are outlined as follows:

a. Acceleration of GDP growth to 6.7 per cent in the period 1992-97 was the highest India
had ever achieved over a five year period.
b. Sum of external current payments and receipts as a ratio to gross domestic product (GDP)
doubled from about 19% in 199091 to around 40% by March 2001
c. Manufacturing achieved average real growth of 11.3 per cent in the four years 1993-94 to
1996-97
d. Export growth in dollar terms averaged 20 per cent in the three years 1994 1996 and the
rates of aggregate savings and investment in the economy peaked in 1995-96
e. Private Investments showed a high growth of 16.34 % per annum during 1992-96.
f. Real fixed investment rose by nearly 40 %, led by a more than 50 % increase in industrial
investments.
g. Declined in the external commercial borrowings in the year 1992. Certain steps have
been taken in the following years to overcome this deficit. Some of them are as follows:
i)

Year: 1993-94: Result of a conscious government policy to maintain a strict

control over external indebtness and resulted favorably in improving the credit
rating of India by international agencies.

ii)

Year:1994-95:Some private sector power and petroleum companies finalizing

their financing packages

iii)

Year: 1995-96: Large demand for borrowing with projects in petroleum, oil
exploration and telecommunications.

h. PMU: Project Management Unit was introduced, as part of the department of Economic
Affairs to monitor, supervise and strengthen various projects.

i. In 1994-95 Government of India has decided not to approach IMF for medium term
funds.
j. Advance release of funds to state governments.
APPENDIX

Figure 1

Figure 2

Figure 3

Figure 4

Figure 5

Figure 6

Figure 7

Summary:

The paper attempts to study and analyze the various causes and factors that prompted the
Balance of Payments crisis that occurred in India in 1991 and to evaluate the various steps taken
by the Government and Central bank to fight the crisis and come out of it successfully.
The paper begins with explaining the Balance of payments as a determinant of the economic
situation in a nation and enumerates the various uses of Balance of payments in various
economic studies. Then the Indian economy in the pre crisis period, i.e. 1980-89 is studied in
detail to understand the underlying causes which culminated during the period and eventually led
to the crisis in 1991. We then move on to the crisis period and indicate the developments like

enormous external debt and depleted for-ex reserves which deteriorated the condition of the
economy in the period. And finally the paper elaborates on the various contingency measures
taken by the government and central bank in order to recover from the crisis. Also, the long term
effects of such policy changes are evaluated.
The paper provides good insights and learning as far as the BOP Trends and crisis is concerned.

References
en.wikipedia.org/wiki/1991_India_economic_crisis

www.imf.org/external/np/sta/bop/bop.htm
www.rbi.org.in Press Releases

www.indiastat.com/economy/8/balanceofpayment/.../stats.aspx