A Decade of Economic Reforms - Review by RBI
[Source: RBI Report on Currency and Finance 2001-2002 dated March 31, 2003]

Module: 5 - External Sector

Current Account: Approach, Developments and Issues
Trends in Invisibles

One of the most significant developments in the current account of balance of payments in the 1990s was the remarkable growth in services transactions with the rest of the world, which was made possible by the revolution in information and communication technology. The information and communication related services (services relating to computer software, hardware, internet, e-commerce and telecommunication sector) experienced unprecedented growth during the last decade, outstripping the growth in merchandise trade. Reflecting the growing importance of trade in services, the General Agreement on Trade in Services (GATS) was adopted in 1993 to extend multilateral rules and discipline to services trade, with particular emphasis on non-discrimination and prohibition of quantitative restrictions. The Reserve Bank has undertaken several measures to relax payments restrictions on transactions pertaining to trade in services and other invisible transactions.

With the shift in the competitiveness towards services, in particular the technology related services, India has emerged as one of the fastest growing exporters of services in the world outstripping the growth rate of industrial countries as well as all countries taken together (RBI, 2002a). Reflecting this, gross invisible receipts (comprising services, transfers and income) increased from US $ 7.5 billion (29 per cent of total current receipts) in 1990-91 to US $ 35.6 billion (44 per cent of total current receipts) in 2001-02. Among the various items of invisible receipts, services increased from US $ 4.6 billion (18 per cent of total current receipts) in 1990-91 to US $ 20.3 billion (25 per cent of total current receipts) in 2001-02. Within services, miscellaneous services receipts, which encompasses communication services, construction services, financial services, software services, news-agency services, royalties, copyright and license fees, management services and others, increased from US $ 2.0 billion in 1990-91 to US $ 14.7 billion in 2001-02, representing 41.2 per cent of invisible receipts in 2001-02. Software services have shown spectacular growth while also emerging as the most important source of miscellaneous services earnings. Software exports increased from US $ 0.3 billion in 1993-94 to US $ 1.8 billion in 1997-98 and further to US $ 7.2 billion in 2001-02, with its share rising from 2.9 per cent to 20.1 per cent of total invisibles receipts during this period. Reflecting the strong growth emanating from software exports, the traditional sources of services exports, viz., travel and transportation have declined in relative importance. Following the heavy inflow of invisibles receipts, India’s current account deficit narrowed down considerably during the decade of the 1990s

One of the factors underlying the external payments crisis of 1991 was the high levels of current account deficit (CAD) maintained during the 1980s which at the time of the crisis had reached 3.1 per cent of GDP, well above the sustainable level for India (Cerra and Saxena, 2002). Concerted efforts directed at imparting strength and stability to the external sector emphasised a policy of maintaining the CAD within a sustainable level of about 2 per cent. This is broadly in line with the recommendations of the High Level Committee on Balance of Payments (RBI, 1993), which recommended that CAD-GDP ratio could be sustainable at 1.6 per cent. The current account deficit averaged only about 1.0 per cent of GDP during the last decade (1992-2002), as compared with 1.8 per cent in the 1980s, and recorded a surplus in 2001-02 after a period of 23 years. Among the components of current account, while the trade deficit (BoP basis) declined marginally from 3.2 per cent of GDP during the 1980s to 3.0 per cent during 1992-2002, the invisibles surplus increased significantly from 1.4 per cent of GDP to 2.1 per cent over the same period(Chart VII.12). With the narrowing of the current account deficit in the recent years, there is a need for revisiting the issue of sustainability of current account in the Indian context.