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Chapter 6:
BALANCE OF PAYMENTS

The Indian economy has, by and large, faced difficult balance of payments situation right from the First Plan. With very few exceptions, India has had a negative balance of trade throughout the last thirty years. The difficulties on the balance of payments front, therefore, are not new for the Indian economy. However, on present reckoning, the balance of payments problems facing the country during the Sixth Plan ,are likely to be acute and will require innovative approaches to cope with the situation.

6.2 Annexure 6.1 gives the estimates of India's Balance of Trade for 1979-80 and the projected picture for 1984-85. The trade deficit in the base year of the Plan, namely 1979-80, has been estiamted at Rs. 2370 crores which is higher than ever before. It was, nevertheless, possible to manage the situation because of the substantial net inflows on account of invisibles which included inward remittances from abroad, particularly from Indians working abroad, and the earnings on account of tourism, transportation, insurance, etc. It is estimated that the trade deficit by the end of the Sixth Plan will increase to about Rs. 3972 crores, the maior increase being on account of the expected increase in the import bill in respect of petroleum and petroleum products. Aggregate imports are estimated to increase from Rs. 8790 cror^ in 1979-80 to Rs. 13850 crores in 1984-85 at 1979-80 prices, inclusive of contingency imports.

6.3 India's exports are proiected to increase from Rs. 6420 crores in 1979-80 to Rs. 9878 crores by the end of the Sixth Plan. This represents a compound annual growth in export volume of about 9 per cent and it is consistent with Sixth Plan objective of an annual increase of 5.2 per cent in the gross domestic product.

6.4 Annexure 6.2 shows the proiections of all maior items of balance of payments at constant prices. Despite a substantial growth in exports and net inflows of external aid of Rs. 5889 crores, there would still be a gap in the balance of payments. This is proposed to be met partly from our own foreign exchange reserves which will be allowed to be drawn down to the extent of Rs. 1000 crores and partly from additional capital inflows from abroad, including borrowings from commercial sources.

6.5 The task of policy during the coming years would be to contain the balance of payments gap within the limits projected and this will require a massive effort to realise the assumed export growth of 9 per cent in volume terms, to contain the growth of imports to 7.9 per cent (excluding contingency imports) per annum, to continue to attract remittances from abroad and promote the earnings from tourism and other sources of foreign exchange. At the same time, utmost economy will need to be exercised in the outgo of foreign exchange for non-essential purposes.

6.6 The main assumptions underlying the balance of payments projections and the policy measures required to make them realisable are discussed in the following paragraphs.

EXPORTS

6.7 Exports during the Sixth Plan are projected to grow at a rate much faster than the one observed (6 per cent) in the last decade i.e. an annual average rate of 9 per cent at 1979-80 prices.

6.8 Agricultural exports on the whole have been projected to grow at almost the same rate as that of overall exports projected for the Plan. India's share in world exports of agricultural commodities is only about 1 per cent; there is thus scope for increasing the exports. Also, the accelerated growth in agricultural production visualised in the Plan should permit generation of exportable surpluses for several agricultural products. While in the case of commodities of mass consumption such as foodgrains, exports can be considered only after meeting fully the needs of our people, it should nevertheless be possible to export better varieties of cereals such as fine grain rice and aim at a substantial growth in exports of plantation crops, marine products and other processed food products. Marine products and processed food exports have been projected to grow at an annual rate of around 15 per cent at constant prices. Exports of cashew have been projected to grow only at a rate marginally higher than that in the recent past in view of the constraints in the supply of raw nuts from abroad and the time lag involved in stepping up domestic production. Sugar exports will be conditional on the possibilities of exportable surpluses from the domestic market. The share of agricultural exports in domestic output, except for plantation crops, would still be low.

6.9 Exports of manufactured items have been projected to grow at a rate slightly higher than the overall growth rate in exports. Industrial production is expected to grow at around 8 per cent during the Plan period. This is expected to provide substantial exportable surpluses, especially of engineering goods, garments and textile products, silk, woollen and man-made textiles, chemical products, plastics, leather products (notably travel goods and sports goods), and various other "handicraft items including carpets, gems and jewellery. More than half the projected growth in our exports is expected to be contributed by the above items which are relatively labour-intensive and have a higher value added. On the other hand, the traditional exports of manufactured items like cotton piece-goods and jute fabrics have been projected to grow only moderately on account of the severe competition from synthetic products as well as the restrictive import policies pursued by some of the industrialised countries.

6.10 In the mineral sector, exports of iron ore have been projected to increase from the estimated level of 24 million toanes in 1979-80 to 30 million tonnes in 1984-85; this is in addition to 2 million tonnes of iron ore pellets and another 5 million tonnes of concentrates from the Kudremukh project. A growth rate of 2.8 per cent has been assumed in respect of other mineral exports.

6.11 Commodity-wise export projections for the period 1980—85 are given in Annexure 6.3.

IMPORTS

6.12 Import requirements have been projected for major items like petroleum crude and petroleum products, fertilizers and fertilizer raw materials, steel, non-ferrous metals, edibie oils, newsprint and cement, taking into account the targst growth rate of the economy and the additional capacity creation in the different sectors during ihe Plan period. The projected imports of major items have been cross checked with detailed material balances as well as through the input-output mdel.

6.13 Crude oil and petroleum products account for a substantial share in the projected imports. The import bill on this account is projected to go up from Rs. 3202 crores in 1979-80 to Rs. 4641 crores in 1984-85. Over the Plan period, total imports of POL are projected to be Rs. 19977 crores. Though it is o'f vital importance for the country to reduce its dependence on imported energy by augmenting domestic production of crude oil and substituting oil products by alternative sources of energy, in the medium term plan, the choice on both these fronts is somewhat limited.

6.14 Domestic production of chemical fertilisers will be stepped up substantially; nevertheless, imports will continue during the Plan period to meet the rapidly rising demand for this vital input for agricultural development. Increased domestic production particularly of phosphate fertilisers will push up the demand for raw materials like rock-phosphate and sulphur As the country is not favourably placed in regard to the producuon of these materials, bulk of the requirements will have to be imported.

6.15 Even though a substantial step-up is expected in the production of mild steel, it may not be possible to match indigenous product mix with demand for all sizes and sections of steel products. This would necessitate imports of certain categories of sleel, particularly shaped products. The Plan provides Ks. 2745 crores for such imports.

6.16 Studies regarding demand and production of non-ferrous metals indicate that the country will continue to depend on imports of these metals for meeting its requirements. The value of imiports of four major non-ferrous metals, viz. aluminium, copper, zinc and lead is estimated at Rs. 1915 crores over the Plan period.

6.17 A provision of Rs. 676 crores has been made for cement imports to hit the domestic supply gap.

6.18. Domestic production of newsprint will not be suilicient to meet tile growing demand fully. Imports worth Ks. 5yu crores are estimated during the Plan period.

6.19 In view of the likely comfortable position on the agriculture front, it is hoped that there would be no need to import foodgrains. In the ease of edible oils however, it would be prudent to provide for imports of this item of essential consumption to prevent excessive price increases. The Plan provides As. 2920 crores tor the import of these oils. However, it may be possible to scale down these imports if the efforts now being made to step up the domestic production of vegetable oils are successful.

6.20 Despite increased availability from indigenous sources, the country will continue to import a imall pan of its requirements of machinery to meet the special needs in off-shore driling, telecommunications, space and other technology-intensive sectors. A part of the imports will go into export production. Larger imports of precious and semi-precious stones will be needed for the growing export industry of reworked precious stones. Provision has also been made for a certain amount of imports to meet unforeseen contingencies, such as higher than expected increase in import prices. The commodity composition of imports is given in Annexure 6.4.

6.21 The projections of balance of payments in Annexure 6.2 have been presented at 1979-80 prices. Exports and imiports are estimated at constant prices. The total volume of imports is constrained by the purchayng power of exports, and total capital inflow at constant prices. The loss in the purchasing power of exports is estimated by calculating the likely deterioration in the terms of trade. The capital account was estimated initially at current prices and then converted to constant prices by using the appropriate import price indices.

INVISIBLES

6.22 Net receipts from invisibles at current prices have been projected to remain more or less at the estimated level of the base year. Tourism, private transfers and investment income are the major items on the invisible account. While income from tourism is projected to grow at the rate of 12.5 per cent per annum, the net inflow on account of private transfers is assumed to record a decline during the Plan period in view of the uncertainties in the prospects of labour absorption in foregn countries. In the case of tourism. There is a further scope for increase in the earnings provided recessionary trends in the advanced countries are checked and we can step up the requisite-promotion activities in this sector.

FOREIGN AID AND BORROWINGS

6.23 The net capital inflow from abroad is projected at Rs. 9063 crores at 1979-80 prices. But for the projected developments in export/impoit prices, implying a deterioration in the terms of trade and erosion thereby in the real purchasing power of expons, the real value of the net inflow from abroad would have been larger by Rs. 2913 crores as shown in An-nexure 6.2. The estimates of resources assume a net inflow of aid and borrowings of the order of Rs. 10975 crores at 1979-80 prices. Out of the total inflow, net aid is estimated at Rs. 5889 crores. The aid estimates take into account the possibilities of increased aid from world agencies and assume improvements in the disbursement of aid, amongst other things through speedy project implementation. The projections of aid inflow are made after taking into account the uncertain climate for international aid. The rest of the gap in the balance of payments is projected to be met by other borrowings, including commercial borrowings and drawal on foreign exchange reserves. The estimates of borowings have been guided by the need to keep down the debt-service ratio. The details of the balance of payments projections are given in Aunexure 6.2.

TRADE AND PAYMENTS POLICIES

6.24 T'he trade and balance of payments projections which have been incorporated in the Sixth Five Year Plan calculations require that both import substitution and encouragement of exports will have to be pursued vigorously through the adoption of efficient policy instruments and innovations made in the pattern of financing.

6.25 The investment allocations made in the Plan assume a considerable degree of import substitution in a number of industries, namely, steel, cement fertilizers, crude oil and capital equipment of all kinds, including the science-intensive areas such as electronics. However, it will be counter productive to pursue a policy of indiscriminate import substitution. The emphasis has to be on efficient import substitution which improves both our balance of payments as well as national income. In order to ensure that the export efTon is sustained and the country's competitive ability improved, it will be necessary to bring about a re-orientation in the economy from producing wholly for the domestic market to producing both for the domestic and the international market, thus earning foreign exichange for the country and at the same time benefiting the domestic economy through reduction of costs and improvement of quality. What this mains is that export production should bs profitable. In view of the resource constraints, it would he necessary to keep down to the minimum export assistance provided from the budget; nevertheless, with all the improvement which can be made in the regime of import restrictions, price policy and the like, umight still le necessary to provide some support from the budget in ensuring that the export effort is not adversely affected. It is also important to ensure that institutional arrangements for export credit and for financing of foreign trade are strengthened and priority attention is given to the provision of export finance on reasonable terms. A decision has already been taken by the Government to establish an Export Import Bank. Some aspects of foreign trade policy are discussed in Chapter 7.

6.26 With respect to invisibles, we should continue to adapt the incentives provided for directing inward remittances in the light of changing circumstances. It will be necessary to encourage investments from persons of Indian origin resident abroad into remunerative areas and also to improve the quality of service provided in the handling of remittances. There is scope for promoting tourist earnings and consistent with the ether objectives of the Plan investment allocations have been made for this sector. There is also scope for expanding earnings from other services, such as shipping, insurance and banking and the task of policy will be to keep alive to the opportunities as they are presented and to permit a quick and flexible response to make use of them.

6.27 The international environment in which we have to function is undergoing a considerable change. While foreign assistance on a concessional basis can be expected to continue at around the present level and may even increase somewhat, it is not a source solely on the basis of which we can confidently plan our investments. In the past few years, there has been a rapid increase in the re-cycling of funds through the international banking mechanism and several developing countries have made use of international capital markets for meeting their foreign exchange requirements. Our policy in regard to borrowing on commercial terms has by and large been restrictive in view of the paramount need to keep tne country's indebtedness within limits and to maintain our ability to service the foreign debts. It is nevertheless desirable to make selective use of the opportunities of borrowing abroad, particularly for financing projects which have a high rate of return and are also able to strengthen our export capability. It is in the light of these considerations that the balance of payments projections include borowings from abroad on commercial terms.

6.28 The fact that India has had a comfortable level of foreign exchange reserves has given confidence to the economy and also enabled us to take risks in policies and programmes which we could not take a few years ago, when the foreign exchange reserves were uncmportably low. It is necesasry, therefore, to maintain a fair level of reserves even in the face of the pressing requirements of the economy. The Plan provides for a reduction of Rs. 1000 crores; even so at the end of the Plan, reserves as a proportion of total imports will not be lower than about 25 per cent.

Annexure 6.1 Balance of Trade: 1979-80 and 1984-85
(Rs. croresat 1979-80 prices)

Annexure 6.2 Balance of Payments Projections: Total for 1980—85

* of this total, the resources available for financing public sector outlays will be Rs. 10929 crores,

Annexure 6.3 Exports
(Rs. crores at 1979-80 prices)

* Provisional estimates.
**Includes cereal exports.

Annexure 6.4 Imports
(Rs. crores at 1979-80 prices)

•Provisional estimates.
** Aluminium, copper, zinc and lead.