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BALANCE OF PAYMENT CRISIS
“The Balance of Payment of a country is a systematic record of all economic transactions between the resident of the country and the rest of the world.” It is prepared in a single currency , typically the domestic currency. It is the indicator of economic and political stability USES OF BOP ANALYSIS. Overview of macroeconomic and monetary situations of the economy. Study on prospects of direct investment to the nation. Implication on the exchange rate of the currency. Provides data for Economic Analysis. Reveals changes in the composition and magnitude of the foreign trade. Provides indication of the future repercussions of country’s past trade performances. Reveals the weak and strong point’s of a country’s foreign trade relation. BOP: The Crisis It is also known as “Unfortunate Period” of Indian Economy. Crisis was caused by currency overvaluation and current account deficits. Political Disturbance: VP Singh government overthrown, Rajiv Gandhi assassination- reduced credibility of India, as a result investors lost their interest and trust in India’s government. Gulf Crisis of 1990- increase in OIL import bill. Important trading partners like US, Russia turned up to invest in India. Export Growth reduced to 4%. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports. Doubling of external debt from 1984-1985 to 1990-1991. Agreement with IMF for a drawing of $1,025 billion under its Compensatory and Contingency Financing Facility. Drawing of $789 million from the First Credit Tranche made in Jan 1991. Despite the drawings the situation was hardly under control. Steps taken by the Government Government leased 20 tonnes of confiscated GOLD to SBI for $200 million. RBI moved in four installments 47 tonnes of GOLD held by it to the vaults of the Bank of England to raise a temporary loan of $405 million jointly from the Bank of England and Bank of Japan. New government assumed charged in 1991. Narasimha Rao took over as PM in June 1991, the crisis forcing him to rope in Manmohan Singh.
Reforms Undertaken
80% of the industries were taken out from the licensing framework. Privatization 1. Areas reserved for public sector was narrowed down and greater participation was permitted from the private sector . The limit of foreign equity holders was raised from 40% to 51% in the wide range of industries. Government undertook a limited disinvestment of a part of a public sector equity to the public through financial institutions and mutual funds. Sick Industrial Companies ACT- To bring public sector undertakings also in pureview. MRTP Act was amended to eliminate the need for prior approval by large companies for capacity expansion or diversification. Technology imports for priority industries are automatically approved for royalty payments upto 5% of domestic sales and 8% of export sales for lumpsum payment of Rs 1 crore. The exchange rate of the rupee was also adjusted in July 1991 to bring it to a credible level which could be defended. FISCAL CORRECTION: The key element was to restore fiscal deficit. Both the balance of payments problems which were building up over the past few years and the persistent inflationary pressures were the result of huge fiscal deficit. Decision was taken to abolish export subsidies, to increase fertilizers prices, as well as the steps taken to keen non -plan expenditure (include defense expenditure in check). In July of 1991 the Indian government devalued the rupee by between 18 and 19 percent. The government also changed its trade policy from its highly restrictive form to a system of freely tradable EXIM scripts which allowed exporters to import 30% of the value of their exports. Announcement of 2 schemes designed to encourage the inflow of capital funds from abroad. The India Development Bond Scheme and the Immunity Scheme for repatriation of funds held abroad were introduced in October 1991.
LPG and its effects
LIBERALIZATION Liberalization means removal of government restrictions from economic policies. By liberalizing the trade means government has removed the tariff, subsidies and other restrictions imposed on the trade between the countries. Measures taken for Liberalization Liberalization of export and import transactions. Liberalization in Taxation Policy. Liberalization in Capital Markets. Liberalization in Banking System. Freedom to import the capital goods and raw material. Concession from Monopolies Act. Liberalization for Industrial Licensing. Freedom from expansion and production to industries.
Benefits of liberalization Increase in foreign investment. Increase the foreign exchange reserve Control over Price.
Limitations of liberalization Loss to domestic units. Increase dependence on foreign nations. Increase the imbalance.
PRIVATIZATION Privatization means transferring ownership of public service, business, agency from government to private sector. Measures adopted for Privatization Contraction of Public Sectors Sales of share of Public Sector to Private Sector. Sick Public Sector Companies. Memorandum of Understanding.
Advantages of Privatization Increase in efficiency.
Increase in competition. Reduction in economic burden of Government. Reduction in political interference. Encouragement to new innovations. Help in reviving the sick units which have become a liability on the public sector.
Disadvantages of Privatization Greater disparities in income and wealth. Lopsided development of industries in the country. Private sector may not uphold the principles of social justice and public welfare. Problem of financing. Ignores the weaker section of the society.
GLOBALIZATION Globalization means integrating the domestic economy with the world economy. It is a process which draws countries out of their boundaries and make them join rest of the world . Advantages of Globalization Expansion of market. Increase in employment. Brand development. Technological development.
Disadvantages of Globalization Dominance of foreign institutions. Loss of domestic Industries.
Effects of Globalization on Indian Economy Our foreign currency reserves which had fallen to barely $1 billion dollar in June,1991 rose substantially to about $180 billion dollars in March,2007. International confidence in India has been restored. The average growth of export has been more than 20% per annum since 2002-2003. It has lowered the per capita income of the farmers and increased the rural indebtedness. The rate of growth of GDP of India has been on increase from 5.6% during 1980-1990 to 7% in 1993-2001 period.
“The Balance of Payment of a country is a systematic record of all economic transactions between the resident of the country and the rest of the world.” It is prepared in a single currency , typically the domestic currency. It is the indicator of economic and political stability USES OF BOP ANALYSIS. Overview of macroeconomic and monetary situations of the economy. Study on prospects of direct investment to the nation. Implication on the exchange rate of the currency. Provides data for Economic Analysis. Reveals changes in the composition and magnitude of the foreign trade. Provides indication of the future repercussions of country’s past trade performances. Reveals the weak and strong point’s of a country’s foreign trade relation. BOP: The Crisis It is also known as “Unfortunate Period” of Indian Economy. Crisis was caused by currency overvaluation and current account deficits. Political Disturbance: VP Singh government overthrown, Rajiv Gandhi assassination- reduced credibility of India, as a result investors lost their interest and trust in India’s government. Gulf Crisis of 1990- increase in OIL import bill. Important trading partners like US, Russia turned up to invest in India. Export Growth reduced to 4%. The foreign exchange reserves had dried up to the point that India could barely finance three weeks worth of imports. Doubling of external debt from 1984-1985 to 1990-1991. Agreement with IMF for a drawing of $1,025 billion under its Compensatory and Contingency Financing Facility. Drawing of $789 million from the First Credit Tranche made in Jan 1991. Despite the drawings the situation was hardly under control. Steps taken by the Government Government leased 20 tonnes of confiscated GOLD to SBI for $200 million. RBI moved in four installments 47 tonnes of GOLD held by it to the vaults of the Bank of England to raise a temporary loan of $405 million jointly from the Bank of England and Bank of Japan. New government assumed charged in 1991. Narasimha Rao took over as PM in June 1991, the crisis forcing him to rope in Manmohan Singh.
Reforms Undertaken
80% of the industries were taken out from the licensing framework. Privatization 1. Areas reserved for public sector was narrowed down and greater participation was permitted from the private sector . The limit of foreign equity holders was raised from 40% to 51% in the wide range of industries. Government undertook a limited disinvestment of a part of a public sector equity to the public through financial institutions and mutual funds. Sick Industrial Companies ACT- To bring public sector undertakings also in pureview. MRTP Act was amended to eliminate the need for prior approval by large companies for capacity expansion or diversification. Technology imports for priority industries are automatically approved for royalty payments upto 5% of domestic sales and 8% of export sales for lumpsum payment of Rs 1 crore. The exchange rate of the rupee was also adjusted in July 1991 to bring it to a credible level which could be defended. FISCAL CORRECTION: The key element was to restore fiscal deficit. Both the balance of payments problems which were building up over the past few years and the persistent inflationary pressures were the result of huge fiscal deficit. Decision was taken to abolish export subsidies, to increase fertilizers prices, as well as the steps taken to keen non -plan expenditure (include defense expenditure in check). In July of 1991 the Indian government devalued the rupee by between 18 and 19 percent. The government also changed its trade policy from its highly restrictive form to a system of freely tradable EXIM scripts which allowed exporters to import 30% of the value of their exports. Announcement of 2 schemes designed to encourage the inflow of capital funds from abroad. The India Development Bond Scheme and the Immunity Scheme for repatriation of funds held abroad were introduced in October 1991.
LPG and its effects
LIBERALIZATION Liberalization means removal of government restrictions from economic policies. By liberalizing the trade means government has removed the tariff, subsidies and other restrictions imposed on the trade between the countries. Measures taken for Liberalization Liberalization of export and import transactions. Liberalization in Taxation Policy. Liberalization in Capital Markets. Liberalization in Banking System. Freedom to import the capital goods and raw material. Concession from Monopolies Act. Liberalization for Industrial Licensing. Freedom from expansion and production to industries.
Benefits of liberalization Increase in foreign investment. Increase the foreign exchange reserve Control over Price.
Limitations of liberalization Loss to domestic units. Increase dependence on foreign nations. Increase the imbalance.
PRIVATIZATION Privatization means transferring ownership of public service, business, agency from government to private sector. Measures adopted for Privatization Contraction of Public Sectors Sales of share of Public Sector to Private Sector. Sick Public Sector Companies. Memorandum of Understanding.
Advantages of Privatization Increase in efficiency.
Increase in competition. Reduction in economic burden of Government. Reduction in political interference. Encouragement to new innovations. Help in reviving the sick units which have become a liability on the public sector.
Disadvantages of Privatization Greater disparities in income and wealth. Lopsided development of industries in the country. Private sector may not uphold the principles of social justice and public welfare. Problem of financing. Ignores the weaker section of the society.
GLOBALIZATION Globalization means integrating the domestic economy with the world economy. It is a process which draws countries out of their boundaries and make them join rest of the world . Advantages of Globalization Expansion of market. Increase in employment. Brand development. Technological development.
Disadvantages of Globalization Dominance of foreign institutions. Loss of domestic Industries.
Effects of Globalization on Indian Economy Our foreign currency reserves which had fallen to barely $1 billion dollar in June,1991 rose substantially to about $180 billion dollars in March,2007. International confidence in India has been restored. The average growth of export has been more than 20% per annum since 2002-2003. It has lowered the per capita income of the farmers and increased the rural indebtedness. The rate of growth of GDP of India has been on increase from 5.6% during 1980-1990 to 7% in 1993-2001 period.
