15. Critically examine India's balance of payment trends during 1950-2005 and explain the phase of crisis during 1990-92. [12 Marks]

Points to Remember:

India’s Balance of Payments (BoP) from 1950-2005.
Phases of surplus and deficit.
The 1990-92 crisis: causes, consequences, and resolution.
Policy implications and lessons learned.

Introduction:

India’s balance of payments (BoP) represents a record of its economic transactions with the rest of the world. From 1950 to 2005, India’s BoP journey was characterized by periods of significant deficit, punctuated by occasional surpluses, reflecting its evolving economic policies and global economic conditions. The period 1990-92 witnessed a particularly acute balance of payments crisis, forcing India to undertake significant economic reforms. This analysis will critically examine the BoP trends during 1950-2005, with a specific focus on the 1990-92 crisis.

Body:

1. BoP Trends (1950-2005): A Broad Overview

The initial decades (1950s-1970s) were largely characterized by a persistent current account deficit, primarily due to reliance on imports for industrialization and limited export competitiveness. This was partially offset by capital inflows, including foreign aid and concessional loans. The 1980s saw a widening current account deficit due to increased oil prices and rising import demand. However, the situation improved somewhat in the late 1980s and early 1990s due to increased remittances from Indians working abroad.

Join Our Telegram Channel

2. The 1990-92 Balance of Payments Crisis:

The crisis of 1990-92 was a culmination of several factors:

Gulf War: The 1990 Gulf War significantly impacted India’s economy. Remittances from Indian workers in the Gulf region plummeted, and oil prices soared, widening the current account deficit.
Declining Foreign Exchange Reserves: India’s foreign exchange reserves dwindled to dangerously low levels, insufficient to cover even a few weeks of essential imports.
Debt Servicing Burden: The burden of servicing external debt became increasingly unsustainable.
Loss of Confidence: International investors lost confidence in the Indian economy, leading to a capital flight.
Overvalued Rupee: An overvalued rupee made Indian exports less competitive and imports more attractive, exacerbating the trade deficit.

3. Consequences of the Crisis:

The crisis led to:

Inflation: The scarcity of foreign exchange led to inflationary pressures.
Import Restrictions: The government imposed stringent import restrictions, leading to shortages of essential goods.
Economic Stagnation: The crisis significantly hampered economic growth.
Structural Adjustment Program: India was forced to approach the International Monetary Fund (IMF) for a bailout package, which came with conditions requiring structural adjustments, including liberalization and privatization.

4. Resolution and Reforms:

The crisis forced India to undertake significant economic reforms, including:

Liberalization: The government initiated a series of reforms to liberalize the economy, including deregulation, privatization, and opening up to foreign investment.
Devaluation of the Rupee: The rupee was devalued to make Indian exports more competitive.
Structural Adjustment Program: Implementation of IMF-mandated structural adjustment measures.

5. Post-Crisis Trends:

Following the reforms, India witnessed a significant improvement in its BoP position. Increased foreign investment, export growth, and remittances contributed to a reduction in the current account deficit and an accumulation of foreign exchange reserves. However, the current account deficit remained a concern in certain periods.

Conclusion:

India’s BoP experience from 1950-2005 was a journey from persistent deficits to a more stable, though still volatile, position. The 1990-92 crisis served as a watershed moment, forcing the country to embrace economic liberalization and reforms. While the reforms led to significant improvements, challenges remain. Maintaining a sustainable BoP position requires continued focus on export diversification, attracting foreign investment, and managing external debt prudently. A balanced approach that promotes both economic growth and social equity is crucial for ensuring long-term sustainable development and upholding constitutional values of social justice and economic equality. The lessons learned from the 1990-92 crisis underscore the importance of proactive macroeconomic management and the need for a resilient and diversified economy to withstand external shocks.

KPSC Notes brings Prelims and Mains programs for KPSC Prelims and KPSC Mains Exam preparation. Various Programs initiated by KPSC Notes are as follows:-

For any doubt, Just leave us a Chat or Fill us a querry––