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BoP Crisis in India

May 15, 2011

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From 1947 till 1956-57, the India had a current account surplus. By t

end of the first plan, the Trade deficit was Rs. 542 Crore and N
Invisibles was Rs. 500 Crore, thus giving a BoP deficit in Curre
Account worth Rs. 42 Crore. From this time onwards, the trade defi

increased from 3.8% of the GDP at market prices to 4.5% of GDP

Market Prices). The result was an imposition of the exchange contro
This was the first BoP crisis, ever India faced, after independence.
Contents [hide]
Crisis of 1966
CURRENTAFFAIRS

February 2016

Crisis of 1990-91:
LERMS
Rangarajan Panel for Correcting BoP

January 2016 |
December 2015 |

Crisis of 1966

November 2015 |

In 1965, when India was at War with Pakistan, the US responded

suspension of aid and refusal to renew its PL-480 agreement on a lo

October 2015 |
September 2015 |
August 2015 |
July 2015 |
June 2015 |
May 2015 |

April 2015 |
March 2015 |
February 2015 |
January 2015 |

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term basis. The idea of US as well as World Bank was to induce India
adopt a new agricultural policy and devalue the rupee. Thus, the Rup
was devalued by 36.5% in June 1966. This was followed by a substant
rationalization of the tariffs and export subsidies in an expectation
inflow of the foreign aid. The BoP improved, but not because of inflow
foreign aid but because of the decline in imports.

After the 1966-67, the BoP of India remained comfortable till 1970s. T
first oil shock of 1973-74 was absorbed by the Indian Economy
buoyant exports. After that there was an expansion of the internation
trade.

Crisis of 1990-91:

BoP crisis had its origin from the fiscal year 1979-80 onwards. By t
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end of the 6th plan, Indias BoP deficit (Current account) rose to
11384 crore. It was the mid of 1980s when the BoP issue occupied t
centre position in Indias macroeconomic management policy. T
second Oil shock of 1979 was more severe and the value of the impo
of India became almost double between 1978-78 and 1981-82. Fro
1980 to 1983, there was global recession and Indias exports suffer
during this time.

The trade deficit was not been offset by the flow of the funds under n
invisibles. Apart from the external assistance, India had to meet
colossal deficit in the current account through the withdrawal of S
and borrowing from IMF under the extended facility arrangement.
large part of the accumulated foreign exchange fund was used to off
the BoP.

During the 7th plan, between 1985-86 and 1989-90, Indias tra

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deficit amounted to Rs. 54, 204 Crore. The net invisible was Rs. 131

Bills and Acts

Crore and Indias BoP was Rs. 41047 Crore. India was under a se

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BoP crisis. In 1991, India found itself in her worst payment cri

Persons in News
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since 1947. The things became worse by the 1990-91 Gulf war, wh
was accompanied by double digit inflation.

Indias credit rating got downgraded. The country was on the ver

of defaulting on its international commitments and was deni

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access to the external commercial credit markets. In October 1990

Art & Culture in Current Affairs

Net Outflow of NRI deposits started and continued till 1991.

The only option left to fulfil its international commitments was

borrow against the security of Indias Gold Reserves. The prime Minis
of the country was Chandra Shekhar and Finance Minister was Yashwa

Sinha. The immediate response of this Caretaker government was

secure an emergency loan of $2.2 billion from the Internation
Monetary Fund by pledging 67 tons of Indias gold reserves as collater
This triggered the wave of the national sentiments against the rulers
the country. India was called a Caged Tiger.

On 21 May 1991, Rajiv Gandhi was assassinated in an election rally a

this triggered a nationwide sympathy wave securing victory of t
Congress.

The new Prime Minister was P V Narsimha Rao. P V Narsimha Rao w

Minister of Planning in the Rajiv Gandhi Government and had be
Deputy Chairman of the Planning Commission. He along with Finan
Minister Manmohan Singh started several reforms which are collectiv
called Liberalization. This process brought the country back on t
track and after that Indias Foreign Currency reserves have nev
touched such a brutal low.
In 1991, the following measures were taken:
In 1991, Rupee was once again devaluated.

Due to the currency devaluation the Indian Rupee fell from 17.50 p
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dollar in 1991 to 45 per dollar in 1992.

The Value of Rupee was devaluated 23%.
Industries were delicensed.

Import tariffs were lowered and import restrictions were dismantle

Indian Economy was opened for foreign investments.
Market Determined exchange rate system was introduced.

LERMS

In the Union Budget 1992-93, a new system named LERMS was start
LERMS stands for Liberalized Exchange Rate Management. T
LERMS was introduced from March 1, 1992 and under this, a system
double exchange rates was adopted.

Under LERMS, the exporters could sell 60% of their foreign exchan

earning to the authorized Foreign Exchange dealers in the op

market at the open market exchange rate while the remaining 40

was to be sold compulsorily to RBI at the exchange rates decided

RBI.

Another important features of LERMS was that the Government w

providing the foreign exchange only for most essential imports

less important imports, the importers had to arrange themselv

from the open market.

Thus, we see that LERMS was introduced with twin objectives

building up the Foreign Exchange Reserves and discourage imports. T
Government was successful in this.

Rangarajan Panel for Correcting BoP

The Report of the High Level Committee on Balance of Payments,

which Dr. Rangarajan was the Chairman, was submitted in June 19
The important recommendations of this panel were as follows:

A realistic exchange rate and a gradual relaxation of the restrictio

on the current account should go hand in hand.

Current account deficit of 1.6% of GDP should be treated as a ceilin

Government should be cautious of extending concessions

facilities to the Foreign Investors. The concessions were more to t

foreign investors than to the domestic players.

All external debts should be pursued on a prioritized on the basis

the Use on which the debt is to be put.

No approval should be accorded for a commercial loan which ha

maturity of less than 5 years.

There should be efforts so that Debt flows can be replaced by t

equity flows.
The High Level Committee on Balance of Payments, 1993, chaired by
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C. Rangarajan, recommended that the RBI should target a level

reserves that took into account liabilities that may arise for de
servicing, in addition to imports of three months

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Comments
trishna malik July 3, 2011 Log in to Reply

i want to know how is government handling the BOP crisis in the pres
seen.???
Any efforts goin on by the government??
plzz reply!!!
Trishna

Rushabh August 11, 2012 Log in to Reply

how to download this page
reply fast

downloadforexdata.com August 25, 2013 Log in to Reply

interesting stuff.

sukhadev April 1, 2014 Log in to Reply

outstanding data

baby s. hazarika February 20, 2015 Log in to Reply

what is the position or scenerio of bop at present? plz reply.

You must be logged in to post a comment.

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