Explain international economic environment since 1995
International Economic Environment:
Despite a robust growth in trade and recovery in output levels, the
world economy, and in particular the developing countries, continue to face
significant risks and challenges. High level of structural unemployment in the
developed countries, excessive budget deficits notwithstanding the sub-dues
inflation rates, financial market volatility and exchange rate instability are
the risk factors for the developing countries. Sharp movements in the foreign
exchange values of the major currencies have significant repercussion on
several developing countries depending on their openness, liability structure
and trade pattern. Strengthening of domestic financial markets and
macroeconomic fundamentals thus remain a challenging priority for the
developing countries.
The General Agreement on Trade in Services (GATS) has been one of
the major achievements of the Uruguay Round of negotiations and now forms an
integral part of the WTO's (World Trade Organization) legal framework. GATS
cover all services sectors, including financial and is based on two elements.
The first is the set of rules and disciplines which apply to all WTO members;
the second is the "schedules of specific commitment" The "Schedules"
are analogous to the tariff schedules with Government market access commitments
of each WTO member with respect to merchandise goods. The services schedules
each of which amounts to a legally enforceable and binding undertaking on the
part of the Member concerned, contain commitments on individual service sectors
and service activities which define the conditions for assess to the market.
India's schedule of commitments in financial services is made in accordance
with the General Agreement on trade in Services and the Annexed on Financial
Services. All the commitments are subject to entry requirements, domestic laws,
rules and regulations. Our objective in the negotiations under GATS was to
offer entry to foreign services provided in services sectors in which entry was
considered to the most advantageous for us in term of capital inflows,
technology and employment. In return we sought greater access for our skilled
personnel to the markets or our major trading partners. Broadly, our
commitments over a limited offer in the insurance sector as per existing
practice. In the banking sector, India has permitted entry of eight new
licenses per year both for new entrants and existing banks, subject to a medium
share of assets in India's both on and off-balance sheet of foreign banks not
exceeding 15 percent of the banking system as a whole. As far as commitments in
other financial services, such as merchant banking, financial leasing,
factoring, venture capital financial consultancy etc. all envisage locally
incorporated joint venture companies with foreign equity not exceeding 51 percent
except for stock broking where the limit is 49 percent.
Net capita! flows to developing countries have shown a sign finance
decline, particularly after the Mexican financial crisis. However, the various
components of such flows, including direct investments, official and
-private-borrowing, have behaved in different ways. Foreign direct investments,
which remained stable through
1994, declined marginally during 1995. Portfolio flows, on the
other hand, dropped sharply during the first half of 1995, in continuation of a
significant slowdown during the second half of 1994. Recent trends in aggregate
official development assistance indicate a continuing slowdown, leading to
tightening of external financing constraints for some developing countries.
Overall, trends in capital flows indicate the growing importance of private,
non-official flows and mis highlights the importance of sound economic
management policies in the success or failure of individual developing
countries in attracting such flows.
Outlook:
The balance of payment situation in 1995-% remained comfortable.
The situation will, however, need close monitoring in the successive years.
External sector viability in the medium term will crucially depend on
sustaining the growth momentum in exports, while import growth is likely to
slow down somewhat as the initial impact effect of trade liberalization is
absorbed, export growth in future must ensure import financing without
excessive reliance on foreign borrowings. Many of the policy measure necessary to
provide appropriate incentives for exports have already been put in place over
the last five years, but further efforts will be needed to strengthen export
efforts in the light of the emerging international trading environment.
Maintenance of external sector competitiveness will depend critically upon
improvements in the power, transportation, communication and banking sectors.
While some major initiatives have been taken by the Centre for bringing about
the appropriate changes in organisations and delivery of our infrastructure
services, it needs to be emphasized that many of the necessary reforms in the
provision of infrastructure would have to be undertaken by concerned State
Governments and agencies.
An important factor affecting our external sector viability is
performance of the petroleum sector. Domestic production of crude oil has
declined after 1989-90. In spite of some recovery in 1994-95 and 1995-96, oil
production is still below the level reached in 1989-90. Maximum efforts must be
made to increase domestic oil production to reduce our dependence on oil
imports. The growth in non-oil imports during the last two years has been very
high. This is largely, the reflection of sharp revival of industrial and
investment activities, and a catch up for the low level of imports in 1992-93
and 1993-94. The high rates of growth in imports witnessed over the last two
years is likely to moderate over the course of the next few years. In the years
to come, non-oil import is expected to record a growth rate more in line with
the rate of expansion of the economic activity and also show a greater degree
of price sensitivity.
Foreign investment flows can supplement our efforts at mobilizing
investible resources in a non-debt creating way. The response of foreign
investment and portfolio investment to liberalization has been highly
encouraging. Therefore, it is important to ensure that there is no reversal of
our foreign investment policy in the years to come and foreign investment flows
accelerate further over the medium run.
The exchange rate of the rupee, which now reflects market conditions have corrected the real appreciation that took place since March 1993 and is now at a more realistic level. It has displayed volatility in recent months because of speculative factors, but these can be handled through appropriate corrective measures. The economic fundamentals are strong as evidenced by the foreign currency reserve position, growth of industrial and agricultural production, deceleration in the rate of inflation and the rise in employment.
Maintenance of a viable balance of payments and stable exchange
rate depend on the pursuit of sound fiscal and monetary policies. Prudent macro
policies together with structural reform to enhance productivity growth in the
future, are the best guarantees against the recurrence of exchange rate
volatility observed in the recent past. The Government's continued commitment
to sound policies must be established beyond reasonable doubt.
Finally, the Government has been following an external debt
management strategy to ensure that India's debt service ratio will gradually
decline to comfortable levels. The gains are evident from the sharp decline in
the debt service ratio over the years. This trend can be sustained if the
economic reforms in the key areas noted above continue.