Ensure Rise In Cr-Gdp Ratio

The Tarapore Committee has recommended that over the next three years (1997-98 to 1999-2000), external sector policies should be designed to ensure a rising trend in the proportion of current receipts (CR) in the gross domestic products (GDP) (or the CR/GDP ratio) from the present level of 15 per cent.

Noting the continued integration of the countrys economy with the world economy, the committee has recommended a variable current account deficit (CAD) which would be a function of the current receipts.

This, the committee felt, would ensure that the CAD was always at a sustainable level and would not crowd out the economys import requirements.

 

In this context, the panel has suggested that the CAD/GDP ratio track the CR/GDP ratio in such a way that the debt-service ratio gradually declines from the present level of 25 per cent to 20 per cent over the next three years. The panel has said that a slide in the debt-service ratio was a necessary concomitant of a sustainable balance of payment position as non-debt liabilities are expected to show a significant rise in the next few years.

The countrys experience of 1990-91 showed that a CAD of 3 per cent of GDP triggered off the most severe external payment crisis since Independence with the debt-service ratio soaring to 35 per cent .

This was reflected in a rising proportion of current receipts preempted by debt servicing and in the reluctance of international creditors to extend new credit or roll over earlier loans to finance the CAD. The situation was rectified by prudent external sector policies designed to contain the CAD and external debt.

In 1993, the high--level committee on balance of payments under the chairmanship of C Rangarajan recommended that the CAD must be limited to a level that can be sustained by normal capital flows. The committee then felt that a CAD of 1.6 per cent of GDP was a sustainable level.

Also, it felt that a sustainable CAD would depend on the CR/GDP ratio, which measures the degree of openness of the economy. The size of this ratio determines the ability of the economy to make current payments and meet the external debt liabilities. As the proportion of current receipts in the GDP rises, it would provide greater leverage to the economy to raise the proportion of current account deficit to the GDP, without rendering the external debt unsustainable.

For India, the CR/GDP ratio is now around 15 per cent, which allows a CAD/GDP ratio of about 2 per cent while holding the debt-service ratio at around 25 per cent. This configuration is consistent with the economy's requirement of external resources as well as a sustainable debt servicing burden.