India Forex
One of the most striking features about Indias forex history is that there has been a continuous deficit in the balance of trade since two decades. This problem was more acutely experienced in the 50s and 60s. Although the volume of foreign trade in India has increased over the years Indians are not able to derive satisfaction. Every year the total imports exceed the total value of the exports and again give rise to shortfall in the balance of trade. It is true that the level of exports is increasing year after year but the amount of imports is still rapidly rising. Comparing the growth of exports and imports with the Maltusian theory, it could be stated that the quantity of exports is increasing in an arithmetical progression, but the total imports is rising at a geometrical progression.
The second and the third five-year plan organized in the 1950s, aimed for industrial development. Therefore capital equipments and machinery were imported to India on a large scale, as it was a poorly industrialized country before. Such tools were not available in the domestic market. Due to the foul whether conditions India unfortunately imported agricultural commodities in bulks.
In the year 1966 the Indian currency was devalued and the imports became still costlier. Due to the recession period in the 1970s the price of crude oil and petroleum products soared up higher and largely contributed to increase in import value. Due to the inflation the OPEC countries hiked the price of crude oil in 1973-74 and the price acutely increased in the year 1979. Although tremendous efforts were taken to reduce the import of oil by exploration of this resource, but still the value of imports has increased over the years. One of the major causes for additions in import value is due to the import of essential consumer items like cement, non-ferrous materials and oil.
As India availed loan from the IMF for about 5 billion, the authorities involuntarily liberalized the import policies to a large extent. In this way, there was a sharp rise in imports again.
Despite of the heavy growth in imports, the export progress is sluggish. India remained to follow protectionist policy for many years since attaining independence in 1947. The depression period that took place in the year 1973-74 increased the total imports as well as restricted the growth of exports. During that period even the developed countries followed restrictive trade practices. Even today India regularly faces two crisis a) problem of transportation. b) Constant power cut. Due to the shortage in power supply, the production process is acutely interrupted and efficiency in production also declines. The commodities like tea, hides and skins do not substantially contribute to exports.
In the year 1980 when the value of the dollar was increased it affected Indias balance of trade. India has maintained a very close trade relationship with U.S compared to the other countries. Almost 80% of the imports and exports are transacted in dollars. Due to the rising dollar value, imports have become costlier. The currency of rupee has been overvalued in terms of dollars and therefore exports have also turned costly. With the rise in price in case for textile goods, the demand for the product abroad has drastically declined.
The government has enforced policies to increase exports and decrease imports. One of the methods is by encouraging import substitution. Exploration of oil resources offshore and on-shore has lead to import reduction. The second way of curbing imports is by discovering substitutes for crude oil or develop alterative sources of energy such as solar energy and biogas. The reserve bank of India devalued the value of indian currency in order to boost exports and curb imports. In this way the exports were expected to become cheaper in terms of foreign currencies and the demand for the product would rise. The imports would become costlier and the citizens could avoid flow of commodities into the country.
But the proposed plan would work out only if the exports and the imports are price elastic. The increase in the quantity of the production may always not give rise to better export growth because the quality of the good is also taken into consideration. If there is no quantity increase in exports the realization of foreign exchange would be meager. If the goods imported are essential goods then it is difficult to curb the imports and therefore more cash would flow out of the country.
Inspite of constant downfall in the foreign trade, India can still manage its balance of payment due to net receipt from invisible trade. Invisible trade includes services like shipping, banking, insurance, and investments etc. the prospects for indian tourism is very brighter as India is a country with oldest heritage.
The external borrowings sharply dipped down the foreign exchange reserves form Rs. 5480 to 2,152 crores in December 1990. The exchange reserves have been built largely from borrowed sources from IMF. Seriously, steps should be taken by the government to increase exports or it will fall into the debt trap over again and again. Voluminous efforts should be undertaken to discover natural resources and effectively utilize them. Emphasis should be laid for generating income through service sectors like shipping, insurance, tourism etc. already the sector of IT in India is gathering momentum. Business Process Outsourcing has also become a larger source of income to the Indians. The burning issue of unemployment has been drastically resolved due to this change.
As far as Indias external debt structure is concerned, the cost of borrowing from international banks is very high compared to institutional borrowing. The cost of borrowing is approximately 17% to 18% from the euro-dollar market and only 10% from the IMF. The lending countries usually extend loan to them on strict conditions. Moreover, the developing countries lack the expertise to borrow funds from the right source whose repayment conditions are easy. One of the most uncertain problem that may occur is the fluctuation of currency. If India borrows in dollars, it must repay in dollars only, but if fluctuations in currency prevail in the market it will be paying additional cost. The problem of external debt can be resolved only by increasing the volume of exports in India.
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