Balance of payments

1.64 The East Asian crisis, which loomed as a large black cloud over the world at the beginning of 1999, seemed to disappear as quickly and unexpectedly as it had arrived. Its after effects, in terms of negative and positive lessons, are likely to linger for some time. The affected countries (with one exception) recovered as quickly as they had collapsed replicating the V shaped pattern seen in the earlier Mexican crisis. This recovery contributed to the recovery of world output and trade volumes in 1999. Output growth accelerated from 1.9 per cent in 1998 to 2.6 per cent in 1999, while world trade volume growth accelerated from 4.2 per cent in 1998 to 5 per cent in 1999. Even though global oil prices increased by 37.8 per cent in 1999 reversing the fall of 31.9 per cent in 1998, other traded goods prices continued to fall. Unit value indices of manufactured exports (G5) declined by 0.6% in 1999 following a decline of 3.9 per cent in the previous year. Non-fuel primary commodity prices declined by another 11.2 per cent in 1999 after a fall of 15.7 per cent in 1998. All these are however projected to show a growth of 2.5 to 2.8 per cent in 2000.

Current account deficit

1.65 The deficit in the current account of the balance of payments declined significantly to $ 4.0 billion in 1998-99 from $5.5 billion in 1997-98. This current account deficit was only 1 per cent of GDP in 1998-99. With the sharp increase in oil prices, the current account deficit is expected to widen to between 1.6 to 1.8 per cent of GDP in 1999-2000. Total net capital inflows had declined by about $1.5 billion in 1998-99 largely because of the sharp drop of $ 148 billion in net private capital flows to emerging markets between 1996 and 1998. Though India was largely immune from the direct effects of the Asian crisis, the uncertainty created by post-Pokhran sanctions reduced this immunity. Capital flows have recovered with the decline in such uncertainty, as reflected in the reversal in portfolio flows from negative to positive. As private capital flows to emerging markets remain at reduced levels ($ 68 billion in 1999) there is still some continuing impact, with FDI inflows declining in 1999-2000. External Commercial Borrowing is sharply down because of lower demand from corporations. The net effect is, however, an increase of total net capital inflows to $ 4.2 billion in April-September 1999, from $ 3.1 billion in the first half of 1998-99 (Table 1.8) .

Trade deficit

1.66 The $ 1.5 billion decline in the current account deficit in 1998-99 was driven by an even larger ($ 2.3 billion) decline in the trade deficit. The decline in payments on account of imports by 7.1 per cent far exceeded the 3.9 per cent decline in receipts on account of exports. The most important contributor to the import decline was oil, driven largely by sharply lower prices. With the dramatic reversal in oil prices, the payments on account of oil imports have already jumped by 53.3 per cent in April-September 1999 (over April-September 1998). As a result total import payments have risen by 2.7 per cent during this period. The recovery in growth of export receipts, at 7.8 per cent, has however been robust, with the result that the trade deficit has narrowed down by about $ 600 million during this period (over corresponding period of last year).

1.67 The sharp rise in world oil prices has also led to a substantial increase in the Oil Pool Account deficit, despite the increase in diesel prices in October, 1999.

1.68 From an international comparative perspective, the export performance of India in 1998 (decline of about 4 per cent in US $ value) was worse than China’s (0.4%) and the World’s (-1.6%) but better than that of the developing countries (-6.3%). In the first three quarters of 1999, our export growth (6.1%) continued to be better than that of the developing countries (-0.2%) and moved well ahead of China (2.6%) and total world exports (-0.4%). Our share of exports in world imports as well as in industrial country imports, after falling in 1998, has risen in the first three quarters of 1999. Imports of industrial countries grew by 2.6 per cent in 1998 and 4.3 per cent in the first three quarters of 1999. The 12.9 per cent growth in April-December 1999, as per DGCI&S data, indicates the continuing strength of our exports during the current Financial Year.

1.69 Non-oil customs import payments (US $) increased 6.3 per cent in 1998-99, but the rate of growth was only 1.3 per cent excluding gold & silver imports. In April-September 1999, there has been a decline of 1.9 per cent in non-oil customs imports (over April-September 1998). The decline is marginally greater at 2.2 per cent if we exclude gold & silver imports. That there has been some recovery in subsequent months is indicated by the DGCI&S data, which shows a growth of 1.4 per cent in non-oil non-gold imports during April-November 1999. The main factor in the slow growth of such imports is an almost one-third decline in the US $ value of capital goods imports. This decline in capital goods imports is linked to the slowdown in investment by corporate industry and the decline in FDI over the past two years. There was a marginal increase in non-POL imports by 1.1 per cent during April-December 1999 (as per DGCI&S).

Trade reform

1.70 Trade policy reforms during 1999-2000 included the following:

• Import of 894 items made licence free and 414 items put on SIL (Special Import Licence) list.
• Free Trade Zones (FTZ) to replace export processing zones and these are to be treated as outside the country’s customs territory.
• Increased recognition of potential of Service exports reflected in a new chapter in EXIM policy on such exports.
• Extension of 80HHC benefits to exporters of entertainment industry.
• Zero Duty export promotion capital goods scheme (EPCG) extended to chemicals and textiles. No "additional customs duty" on import of capital goods under zero duty EPCG scheme in marine and software sectors.
• Entitlement of domestic tariff area sales for Export Oriented Units (EOUs) and EPZs increased to 50% of f.o.b. value of previous year.
• Pre-export Duty Entitlement Pass Book Scheme (DEPB) credit entitlement increased from 5 to 10 per cent of previous year’s performance.

Invisible account

1.71 Net inflows on invisible account reached a plateau of around $10 billion in 1996-97. They have declined since then to $ 9.2 billion in 1998-99, primarily because of a decline in private transfers, which fell from $ 11.8 billion in 1997-98 to $ 10.3 billion in 1998-99. Driving this fall was a sharp fall in imports of gold and silver by returning Indians (under the baggage rules) from $ 2.5 billion to $ 171 million in 1998-99. Software export receipts have, however, continued their vigorous growth, rising 54 per cent from about $ 1.70 billion in 1997-98 to about $ 2.6 billion in 1998-99. Software exports continued their phenomenal rise, growing by over 50 per cent during April-September 1999.

Capital account

1.72 The surplus in the capital account of the balance of payments declined to $ 7867 million in 1998-99 from $ 9393 million in 1997-98, despite the exceptional inflows under Resurgent India Bonds. This mirrored the sharp fall in private capital flows to emerging markets from $ 214 billion in 1996 to $ 66 billion in 1998. Total foreign investment (FDI and portfolio) declined to $ 2312 million in 1998-99 from $ 5853 million in 1997-98, as a result of a reduction of $ 1.8 billion portfolio flows and a 32 per cent reduction in FDI. During 1998, the flows to developing countries declined by 3.8 per cent, resulting in India’s share in these flows falling sharply to 1.4 per cent. World FDI flows to developing countries peaked in 1997 ($ 173 billion) when India’s share in these flows was 1.9 per cent.

1.73 Net external commercial borrowing increased by $ 363 million to $ 4362 million in 1998-99. Foreign aid, the direct target of the sanctions, declined by only 10 per cent to $ 820 million. As all redemption payments under FCNRA were completed in 1997-98, total (net) flows of non-resident deposits increased in 1998-99.

1.74 The capital account in the balance of payments has improved significantly in 1999-2000. Total inflows during April-September 1999 were $ 4247 million, compared to $ 3057 million during April-September 1998. Portfolio investments have shown a sharp turnaround to an inflow $ 1349 million from an outflow of $ 540 million in the corresponding period. Non-resident deposits also show a similar turnaround to $ 932 million from $ 46 million. FDI inflows, however, declined by 25 per cent to $ 1057 million from $ 1408 million over the corresponding period. Though the decline is only 17.4 per cent for April-November 1999, this remains an area of serious concern, particularly so in the light of the medium term target of $ 10 billion of FDI flows. The introduction of a transparent and expanded automatic approval system based on the negative list principle will help in reversing this trend.

1.75 Though external commercial borrowings have also declined sharply to $ 62 million in April-September 1999, from $4328 million in April-September 1998, the latter includes the proceeds under RIB ($ 4.2 billion). The other ECB flows (excluding RIB) have not declined further since in 1998-99. The reduced disbursements are more reflective of the slow down in corporate industry since 1997-98 and the easy liquidity condition in domestic credit markets since 1998-99. International credit rating agencies that had expressed some concern in 1998-99 have already given a positive assessment of the current situation. With industry recovering from the growth slow down, demand for ECB is likely to pick up.

Policy reform

1.76 Among the external sector reforms undertaken in 1999-2000 were:

• Foreign Exchange Management Act, 1999 was passed to replace FERA. Its provisions are in conformity with a liberalised market for foreign exchange.
• Prevention of Money Laundering Bill has been introduced in Parliament.
• Comprehensive automatic approval system for FDI, based on a negative list and transparent sector limits.
• Foreign equity limit for FDI through automatic route for drugs and pharmaceuticals raised to 74 per cent (from 51%).
• An automatic route opened for issue of ADRs and GDRs by Indian companies under liberalised guidelines.
• Software companies can issue ADRs or GDRs for the purpose of acquiring foreign software companies up to $100 million under an automatic route.
• ECB guidelines liberalised.
• Minimum maturity for FCNR (B) raised to one year (from 6 months) to align it better with general ECB term limits. Incremental CRR of 10 per cent on these deposits simultaneously abolished.

Foreign exchange

1.77 The Foreign currency assets of the RBI increased by US $3.5 billion in 1998-99 and further by about US $2.4 billion in 1999-2000 so far (till end January 2000) to US $31.94 billion. The value of RBI gold holding had declined to $2945 million by end January 2000 because of redemption under the Gold Bond Scheme and valuation changes. Total foreign exchange reserves (including gold and SDRs) at the end of January 2000 amounted to US$ 34.90 billion, which provides cover for about 8 months of estimated imports in 1999-2000.

External debt

1.78 The external debt to GDP ratio has been declining continuously from a high of 41 per cent in 1991-92 to 23.5 per cent in 1998-99. At the end September 1999 it was lower at 22.3 per cent. The absolute value of external debt rose marginally from $ 97.68 billion in March 1999 to $ 98.87 billion in September 1999. The share of short-term debt in total debt has declined from 5.4 per cent in March 1998 to 4.7 per cent in September 1999. The ratio of short-term debt to foreign exchange reserves has similarly declined from 17.2 per cent in March 1998 to 13.9 per cent in September 1999. The debt service ratio fell from 19.1 per cent in 1997-98 to 18 per cent in 1998-99.

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