*Provisional estimates.
**Net of crude and product exports.
***Aluminium, copper, zinc, lead. tin and nickle.
5.17 Expatriate remittances and travel receipts are, by far, the most important elements of net invisible earnings. A substantial proportion of expatriate remittances originates in the oil producing countries of the Middle East; and unforeseen changes in their development plans and public spending, stemming from uncertainties surrounding the international oil market make it hazardous to forecast the inflow of remittances even over the medium term. The nominal level of expatriate remittances is projected to remain more or less unchanged, thus implying some continuing decline in real terms. Projections of invisible flows also take into account the relatively
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small, but growing, exports of `non-traditionals' such as consultancy services and related specialised expertise. On the whole, net invisible earnings are expected to offset somewhat less than half of the deficit on merchandise account, or a much smaller proportion of it than in the Sixth Plan period.
5.18 The growth of tourist arrivals had suffered from the effects of the severe international recession of the early eighties, which had particularly hit the major source markets. With the international market economy countries coming out of the recession, and more importantly, more effective tourist promotion and market penetration efforts, the growth of tourist arrivals should again attain a higher trend rate. In projecting net invisibles, travel receipts are accordingly assumed to increase on average by about 7 per cent annually.
5.19 The deficit on current account, or foreign savings requirements, implicit in the Seventh Plan Projections or merchandise and invisible flows will be Rs. 20,000 crores. The corresponding financing requirements will, however, be higher because of the fall in the import purchasing power of exports resulting from the larger increase in import prices. Additionally, foreign exchange reserves would have to be replenished by Rs. 200 crores over the Plan period so that their level does not fall below the required minimum of three months' merchandise imports.
5.20 The external borrowings programme of Rs. 20,900 crores that is projected will ensure adequate availability of imports to attain the GDP growth target. Its size and composition, moreover, will maintain future debt service obligations within manageable limits. The viability of external borrowing programme is usually assessed in terms of conventional indicators like the ratio of debt service payments to current receipts. Because of the changing export coverage of imports, this debt service ratio does not always correctly indicate the proportion of imports that will have to be financed through external borrowing. Thus, the current account deficit relative to imports, or, more generally, as a proportion of GDP is, in some respects, a better index of the debt service burden. However, judging by both indicators, the borrowing programme does 'not exceed safe limits; the debt service ratio remains below 20 per cent, and the current account deficit relating to GDP averages to 1.6 per cent over 1985-90.
Balance of Payments Policy 5.21 Sustained and well directed efforts will be needed during the Seventh Plan period to avert renewed scarcity of foreign exchange. Maintaining a viable balance of payments without constraining output growth or capital formation to unacceptable levels will thus be a prime strategic concern. As such, the actual deficit on current account, and the manner in which it is financed, will have to be kept close to plan projections and anticipations; otherwise the debt service burden could become so onerous as to reduce the availability of foreign exchange for financing the vital minimum of imports. The trade deficit will need to be adequately contained by a much more rapid growth of exports than in the past. Export development, in fact, acquires particular importance as a means of sustaining sufficient and uninterrupted supplies of imported inputs for smooth functioning of the economy, of activating idle capacity, and of exposing industry in- creasingly to the more exacting world market. At the same time, the diversification and deepening of efficient import substitution will require continued support, partly because of greater caution to be exercised in the replacement of energy imports by non-renewable domestic resources. Apart from the possibility of replacing imports in certain areas at a relatively low cost in terms of domestic resources, import substitution has the advantage of being less subject to uncertainty than exports. Greater attention will thus need to be paid not only to the expansion of production in competitive lines but also to all-round improvements in productivity and the consequent reduction in import consumption norms. The attainment of the balance of payments objectives of the Seventh Plan is admittedly not an easy task. But it can be accomplished successfully within an appropriate policy frame, even when its full impact would be felt only after a period because of the logistics of, and reaction time to, changes in policy directions. The major constituents of the required policy are spelt out in Chapter 6.
TABLE 5.5
Balance of Payments Projections 1985-90
(Rs. thousand crores at 1984-85 prices)
1. Exports 60.7
2. Imports -95.4
3. Trade balance -34.7
4. Invisibles (net) 14.7
5. Current account deficit -20.0
Financing
1. Net aid and other borrowing 20.9
2. Use of foreign exchange reserves (- = increase) -0.2
3. Loss from decline in the import purchasing power
of exports -0.7
Memo items (per cent)
1. Debt service relative to current receipts 17.6
2. Current account deficit relative to GDP 1.6
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