5 Main forms of External Flow in Recent years | India

The following points highlight the five main forms of external flow in recent years. The forms are: 1. External Assistance 2. External Commercial Borrowing 3. Borrowing from IMF 4. NRI Deposits 5. Foreign Investments.

Form # 1. External Assistance:

The gross inflows under external assistance from both multilateral and bilateral sources increased significantly from $ 2.40 billion in 1985-86 to $ 3.7 billion in 1990-91 and then to $ 4.37 billion in 1991-92 i.e., by 25 per cent over the previous year.

In recent years, gross inflows under external assistance, comprising assistance under Government and non-Government accounts were about US $ 3.31 billion in 2001-02, compared with the annual average of US $ 2.93 billion over the previous five years ended 1999-2000. Net inflows (net of repayments) during 2001-02 were, however significantly lower at US $ 0.73 billion per year, on an average, during the previous five years.

However, the net flow of external assistance to India in recent years increased from US$ 2.89 billion in 2009-10 to US$ 4.94 billion in 2010-11 showing a growth of 71.3 per cent over the previous year. The net flow of external assistance declines to US $ 1.02 billion in 2013-14 showing a rise by 5.1 per cent as compared to that of previous year.

Form # 2. External Commercial Borrowing:

Moreover, the Government of India is also taking external commercial borrowing from different institutions. A major portion of the external commercial borrowing raised during 1990-91 and 1991-92 have been by way of export credit supported by official export credit agencies such as US Exim Bank, the Japanese Exim Bank, the ECGC of the UK etc.

In 1992-93, the situation has improved as the authorizations have amounted to US $ 1-6 billion during April-September compared to US $ 680 million in the corresponding period of 1991-92. The growth of external commercial borrowings (ECB) has increased during the last part of 1980s but it has come down during the 1990s.

The gross disbursements of ECB has increased considerably from $ 1.47 billion in 1985-86 to $ 2.81 billion in 1988-89 and since then it started to decline and reached the level of $1.10 billion in 1991-92 and then it slightly increased to $ 1.2 billion in 1992-93 and recorded a quantum jump of $ 2.9 billion in 1993-94 and $ 3.5 billion in 2002-03 and then to $ 6.6 billion in 2003-04.

However, ECB recovered a record US $ 5.0 billion worth net inflows in 2004-05 and US $ 6.24 billion in 2008-09. However, in recent years, the net external commercial borrowing also attained considerable increase. In 2013-14, the net external commercial borrowing increased to US$ 11.7 billion as compared to US$ 8.48 billion in 2012-13 and US$ 12.16 billion in 2010-11.

Form # 3. Borrowing from IMF:

In India, substantial amount of drawals have been made from the IMF from 1990-91 onwards under one or other facility. Thus India drew from the IMF between January 1991 and June 1993, a total amount of SDR 3560 million under CCFF and Standby Arrangements.

These loans have to be repaid by April, 1999. But due to marked improvement in the balance of payments position, the Government decided not to approach the IMF for a medium-term Extended Fund Facility which was contemplated earlier.

Instead, the country made advance repayments of $ 1.1 billion to the IMF in April 1994. This amount was scheduled for payment in installments over 1994-95. During 1994-95, repayments to the IMF were of the order of US $ 1.15 billion. IMF repayments in 1995-96 are estimated at US $ 1.72 billion.

Form # 4. NRI Deposits:

Another important source of external finance in India is the flow of non-resident Indian (NRI) deposits. Non-resident deposits have been considered a major component of the country’s capital inflows during the past decade, The outstanding stock of NR deposit has increased from $ 4.59 billion (U.S) in 1985-86 to $ 10.37 billion in 1990-91 and then to $20.4 billion in 1997-98.

Net inflows under NRI deposits increased from US $ 3.0 billion in 2002-03 to US $ 3.6 billion in 2003- 04. However, in 2013-14, the NR deposits net inflows was to the extent of $ 38,892 million. Resurgent India Bond (RIB). The Resurgent India Bond scheme was launched in the year 1997-98 for encouraging the flow of foreign capital from non-resident Indians (NRIs) and Overseas corporate bodies (OCBs).

The scheme was open to both NRIs/OCBs and banks acting in fiduciary capacity on behalf of them.

The scheme was launched on August 5, 1998 and closed on August 24, 1998. Accordingly the RIB scheme mobilized US $ 4.2 billion. The interest rate on these five year bonds were 7.75 per cent for US dollar, 8 per cent for Pound Sterling and 6.25 per cent for Deutche Mark.

Other features of RIBs include joint holding with Indian residents, allowing them to be gifted to Indian residents, easy transferability, loan-ability, premature encashment facility and tax benefits.

Form # 5. Foreign Investments:

In recent years, foreign investments are also considered as an important source of foreign capital. The response of foreign investment flows of the liberalization measures has been very encouraging. Total foreign investment flows, direct and portfolio, rose sharply to US $ 4.11 billion in 1993- 94 and then to $ 4.89 billion in 1994-95 as compared with the average of about US $ 0,27 billion a year during the previous three years.

Foreign investment into India in 2000-01 was higher at US $ 5,099 million compared to US $ 2401 million in 1998-99 because of a rise in the volume of port-folio investment.

In 2001-02, foreign investment into India was again higher at US $ 5,925 million as compared to that of US $ 5,099 million in 2000-01. This was mostly possible as a result of rise in foreign direct investment from $ 2,339 million in 2000-01 to $ 3,904 million in 2001-02 although the portfolio investment has declined from $ 2,760 million in 2000-01 to $ 2,021 million in 2001-02.

Policies in the post-reforms period have emphasised upon greater encouragement and mobilisation of non-debt creating private capital inflows for reducing reliance on debt flows as the chief source of external resources. Progressively liberal policies adopted in this regard have led to increasing inflows of foreign investment in the country, both in terms of direct investment (FDI) as well as portfolio investment.

Annual aggregate foreign investment inflows varied between US $ 4 to 6 billion during the period 1993- 94 to 2001-02 (except for 1998-99). The average volume of foreign investment inflows during the period is estimated to be roughly US $ 4.9 billion (US $ 5.2 billion excluding 1998-99).

The reduced volume of inflows is attributable to heavy outflow of portfolio investment during the current year so far. In 2009-10, foreign investment (net flows) increased to $ 50,362′ million as compared to that of $ 8,342 million in 2008-09.

However, in 2013-14, the net inflow of foreign investment into India was to the extent of US$ 26,386 million, out of which US$ 21,564 million was available in the form of FDI and rest US$ 4,822 million was in the form of net Portfolio investment.