The current account deficit for the year 1997-98 is expected to be around 1.5 per cent of the gross domestic product (GDP), compared with 1 per cent in 1996-97 and 1.8 per cent in 1995-96.
The balance of payments situation in 1996-97 and 1997-98 remained manageable despite some concerns on the export front. Export (2.6 per cent) and import growth (5.8 per cent) decelerated.
Net inflow on the invisibles account surged and reached a new peak in 1996-97, benefiting from the return flow from the redemption of India Development Bonds.
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The capital account of balance of payments exhibited a huge surplus in 1996-97, following sustained buoyancy in foreign investment flows and a surge in net inflow of non-resident deposits.
Total net capital flow in 1997-98 is expected to have been at the 1996-97 level.
The surplus in the capital account of the balance of payments in 1996-97 and 1997-98 exceeded the deficits in the current account by substantial margins, resulting in large accretions to the foreign currency assets of the Reserve Bank.
The foreign currency assets of the Reserve Bank of India increased by $5.3 billion in 1996-97 and further by $3.6 billion in 1997-98 to attain $26 billion at the end of March 1998.
While inflows from Euro equities raised by Indian corporations went up sharply in 1996-97 ($1,366 million against $683 million in 1995-96) they are lower in 1997-98 at $645 million.
Foreign Institutional Investors (FII) investments have also fallen marginally in 1996-97 to $1.9 billion from $2 billion in 1995-96.
This is however significantly lower in 1997-98 at around $752 million.
This the survey argues may partly reflect transitory contagion effect of the currency turmoil in some of the countries of Southeast Asia. The net investment by the 100 per cent debt funds of FIIs in debt securities has been $155.7 million till end March 1998.
Total portfolio investment in 1997-98 has as a result halved - down from $3.3 billion to $1.6 billion in 1997-98.
This sharp fall was however mitigated to some extent by a rise in the foreign direct investment. This went up from $2.1 billion in 1995-96 to $2.7 billion in 1996-97 and has risen further to $3.2 billion in 1997-98.
This has been led by the engineering, chemical and food and dairy products industries.
The survey argues that a positive stance towards FDI is necessary to strengthen the balance of payments situation.
The survey also argues for maintaining a market determined exchange rate to ensure that the export competitiveness of the country is not eroded.
It also argues for hedging foreign exchange risk and clearly states that the "time has come for....setting up and functioning of derivatives markets in
India". It also says that constraints on hedging of exposure on international markets must be phased out.
It also argues for a phased capital account liberalisation, especially in view of the recent Southeast Asian crisis.