India’s Balance of Payments: The Political-Economic Background

The authorities talk of the impending crisis in India’s balance of payments as if it had no history. They trace it to various immediate causes: the alleged ‘excess’ domestic demand generated by fiscal deficits, high international oil prices, low domestic oil prices, the mysterious Indian fascination with gold, high domestic inflation which drives Indian savers to buy gold, the slump in demand for India’s exports due to the sluggish state of the world economy, and so on. In other words, the balance of payments crisis is presented as a malady which is either amenable to a ready cure within the existing policy framework (such as slashing Government spending and hiking domestic petroleum product prices), or is self-limiting, and merely awaits a revival of the world economy (or even limited windfalls such as a fall in international oil and gold prices).

Leaving aside the untenability of such explanations and remedies, what we need to note is that balance of payments problems are not something new to India: they have been endemic to its post-1947 history. And they have deep roots in the political economy of India. As with any phenomenon, it helps to look into the history of India’s balance of payments to understand its present.

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The External Crisis

The entire liberalisation process since 1991was meant to render India internationally competitive and overcome the balance of payments difficulties which had plagued it in one form or another since the mid-1950s. It has instead deepened India’s dependence on foreign capital, increased foreign ownership of Indian assets, and strengthened foreign dictation of Indian economic policy. The part played by the IMF and World Bank in 1991 has now been taken over by credit rating agencies, whose employees extensively monitor Indian policy-making and spell out the demands of foreign capital.

I. Using the crisis

Since January the Finance Minister has been on a hectic roadshow across the world – Singapore, Hong Kong, Dubai, Frankfurt, London, Tokyo, Toronto, Ottawa, Boston, and New York. The stated purpose has been to reassure foreign investors regarding the economic policies and political stability of the Indian government, and to attract fresh investments. It may well be that in the last four months he has spent more time abroad than in the country.

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