Balance of Payment and India’s Sovereignty

21 Aug, 2001    ·   550

Saurabh brings out the complex linkage between balance of payment crisis that India is currently facing and its impact on the country’s sovereignty


Since the beginning of the Second Five Year Plan, India has experienced a balance of payments (BOP) problem. India entered the nineties with large internal and external financial imbalances. This made the economy vulnerable to exogenous shocks.

 

 

The economic crisis of 1991-92 contributed to erosion of international confidence in India . International credit rating agencies started placing India either under watch or downgraded the credit rating of Indian entities. Standard and Poor’s have downgraded India's sovereign credit rating recently for both local and foreign currency to ‘negative’ from ‘stable’, due to its rising fiscal deficit and public debt. India 's public debt could approach 70 per cent of the GDP or more than 400 per cent of its revenues. Its poor infrastructure and chronic power shortages constrain growth. Falling growth prospects, in turn, foreshadow lower tax revenue; and heightened fiscal challenges. Government securities prices dropped after downgrading by the credit agency. Other rating agencies are expected to review their ratings. This situation may lead us back to the 1990-91 position.

 

 

The BOP position during 1999-2000 remained unfavourable. It increased to –$17098 million as compared to –$13246 US during 1998-99. Exports, during 1998-99, faltered with a negative growth rate of 3.9 per cent in US Dollar value. The trade deficit increased from $9.2 billion in 1998-99 to $9.6 billion in 1999-00. Despite a revival of world trade, exports from India are being threatened by emerging protectionist sentiments in the guise of technical standards, environmental and social concerns. Non-trade barriers like anti-dumping duties, countervailing duties, safeguards, sanitary and phytosanitary measures have affected India 's exports. Indian exports affected include floriculture products, textiles, pharmaceuticals, marine products, basmati rice, mushrooms and steel exports. Market access is also affected by the tariff differential for imports in the developed countries, with the average tariff on Indian imports being higher than on imports from the developed countries. Infrastructural constraints, high transaction costs, inflexibilities in labour laws, quality problems, quantitative ceilings on agricultural exports and constraints in attracting FDI for the export sector, remain problematic. The downward movement in the value of the rupee is also a cause for concern.

 

 

India 's external debt reached $97.68 billion in 1999 as compared to $93.53 billion in 1998. Further, it is expected to touch $98.44 billion in 2000. The share of concessional debt in total external debt, which was steady at 45 per cent during the first half of the 1990’s, declined to 38.5 per cent at the end of March 2000. India , in terms of the absolute level of debt, ranked ninth and, in terms of present value of external debt, ranked as the tenth largest debtor country. 

 

 

The heavy burden of external debt and continuing debt payment liability poses another threat to India ’s macro-economic security. The most serious of the problems created by external debt is the regular drain of resources which can be utilized for development purposes. Large scale debt repayment shackles growth. Heavy external debt and debt repayment burden also increases the external dependence of the country on foreign countries and international financial institutions like the International Monetary Fund and World Bank. These international agencies became closely involved in the economy of the country in the process of negotiating debt rescheduling. Such negotiations have required the imposition of harsh measures such as devaluation, reduction of subsidies on basic commodities, removal of trade barriers, exchange controls, and privatization of national industry.

 

 

The conditionalities imposed by these countries and institutions are not only of an economic nature, but are also increasingly assuming political forms – like seeking change in governance, insistence on adherence to human rights norms determined by foreign countries and institutions, abjuring weapons of mass destruction, and reducing military expenditure. These conditionalities have both an indirect and direct bearing on the country’s security.

 

 

The economic component of the conditionalities has weakened the grip of the state over the economy and made the country increasingly dependent on foreign capital and foreign markets. The economic reforms prescribed by the IMF, World Bank and creditor countries call for a shift in emphasis from capital goods to consumer goods industries, greater reliance on private enterprise – both domestic and foreign, foreign capital and foreign markets. This has the effect of exposing the economy to external shocks when the institutional infrastructure and policy mechanism for coping with such shocks have all but been surrendered. This has serious implications for the sovereignty of India and the independence of judgment and action in foreign policy. 

 

 

 

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