4 Problems in Agricultural Fixed Capital Formation
4-1 Deteriorating Budget Deficit
As economic liberalization was proceeding in the latter half of the 1970s, the trade deficit due to increased imports was beginning to expand. Early in this period, India still held relatively abundant foreign exchange reserves, since its agricultural imports had already fallen, and money was being remitted from Indian laborers working abroad. For example, its remittance receipts in fiscal 1980/81 amounted to US$2.7 billion, which played an important role as buffer against the trade deficit (US$7.38 billion for the fiscal 1980/81). Therefore, the trend of relaxing import regulations was maintained, increasing the imbalance of international payments that had been more or less balanced till then (Figure 1-10). In this process, India was hit by the lean harvests of 1979 and 1980 (a 17.6% negative growth of foodgrain production from a year earlier) and the economic crisis provoked by the second oil crisis.
The ruling Janata Party, unable to control the economic disorders collapsed after internal disagreements, and in 1980 Indira Gandhi returned to power. Her administration was, however, also built on a vulnerable base, having to follow policies inclined to the populism based on the subsidies of the Janata era. As a result, central government budget deficit against GDP only continued to increase, and its proportion reached about 8% in the latter half of the 1980s. In the meantime, the Government's outstanding domestic debts exceeded 50% the GDP in the latter half 1980s, up from 35.6% in fiscal 1980/81, significantly derailing the country from balanced finance.
Likewise, the trade deficit swelled considerably great, with a record worst ratio to the GNP, with Indira Gandhi was back in office (See Figure 1-1).
