dependent on a sizeable improvement in earnings from exports and from invisibles. it conceptualised self reliance not merely in terms of reduced dependence on aid but also in terms of building up domestic capabilities and reducing import dependence in strategic materials. however, several developments that put severe pressure on the balance of payments position during the plan need attention. first, the cad assumed a structural character in the 1980s. with underlying expansion in economic activities, exports and imports grew in tandem, keeping the trade deficit at a high level. the invisible balance also deteriorated sharply due to stagnation in worker's remittances and rising interest burden due to building up of external debt. second, with flows of external assistance falling short of the financing need, recourse to costly sources of finance in the form of external commercial borrowings ( ecb ), especially short term debt and nonresident deposits, became relatively large. third, persistence of high fiscal deficit averaging 8. 7 per cent of gdp ( centre and states ) in the latter half of the 1980s, which could be only partly financed by the private sector surplus, thus, became a cause of deteriorating cad. fourth, higher reliance on monetary financing of deficits also led to rise in inflation to double digit in the early 1990s, adversely affecting the relative price competitiveness of india's exports. some possible misalignment of exchange rate, thus, resulted in loss of export competitiveness of exports and bias towards imports. the rising financing requirements described above required not only higher recourse to external debt but also draw down of reserves, which declined to us $ 4 billion by end - march 1990 from us $ 7. 4 billion at end - march 1980. ( see table 3 for india's outstanding foreign exchange reserve position ; and tables 4 and 5 for components of external debt and india's external debt indicators, respectively ). the weaknesses in the indian economy were exposed by the gulf crisis of 1990 and ensuing developments. the current account deficit rose to 3. 1 per cent of gdp in 1990 - 91. around the same time, credit rating of the country was lowered, restricting the country ’ s access to commercial borrowings and unwillingness on the part of normal banking channels to provide renewal of short - term credit to indian banks abroad. as reserves kept on falling on expectations of an impending depreciation of rupee, there was a temporary loss of confidence leading to a flight of non resident indian ( nri ) deposits. the severity

##mittances are excluded from the current account as these represent broadly the exogenous component not driven essentially by the current pace of domestic activities and employment. the current account deficit, in a conventional sense, remained at a moderate level during last three plans. however, an adjusted measure of cad indicates that rapid expansion in domestic economic activities in the recent years has been reflected in higher absorption through external sector. in this light, the indicative cad over the eleventh five - year plan reflects significantly higher absorptive capacity than what the cad to gdp ratios indicate. ( see table 7 for adjusted measure of current account balance ) sixth, the policies for fdi are critical since relative to portfolio flows they are less volatile. while the emphasis is on dismantling of regulatory entry barriers, it is necessary to ensure that they are not portfolio flows in the garb of fdi. it must be recognised that overall investment climate must be improved so that both domestic and foreign investors are attracted. in the final analysis, well over ninety per cent of our investment has to be funded by domestic saving. hence, generalised improvements in investment climate are crucial and fdi flows will also be enabled by such an environment. overall, consistency in legal framework within the country and in line with international standards modified to suit our needs, and accompanying state level reforms would be useful in this regard. overall, flexibilities are essential for supply and demand responses to price signals, which are critical for improving investment climate and more generally, for an open economy that best serves the national interest. finally, the gross volume of capital account transactions has been rising at a rapid pace, with bidirectional flows. capital flows are managed from the viewpoint of avoiding adverse impact on primary liquidity growth and inflationary pressures. capital flows are to be seen in the context of supply response of the economy and vulnerabilities or potential for shocks. a key issue in managing the capital account is credibility and consistency in macroeconomic policies and the building up of safety nets in a gradually diminishing manner to provide comfort to the markets during the period of transition from an emerging market to an evolved market. this also underscores the importance of continuing prudential regulations over financial intermediaries in respect of their foreign exchange exposures and transactions, which are quite distinct from capital controls. let me conclude by thanking you all for giving me this opportunity and wishing the diamond jubilee celebrations all the best. thank you.