India Culture, Business, Sports and Food. Get all the buzz in India now

EXTERNAL DEBT

Government of India borrowed heavily during the 1980S to finance the current account-deficit which kept on rising steadily. In 1990, the year of the so-called Gulf Crisis, over 51 % of the current account balance came to be financed by commercial borrowings (26%) and NRI deposits (35%). Total external debt (EDT) outstanding (as reported in World Bank’s World Debt Tables) increased from $ 20.6 billion in 1980 to $ 71.6 billion in 1991 – a 248% increase as against a GDP real growth of71 % during the period. If we go by the figures of the Ministry of Finance which includes the defence debt, EDT goes to $ 81.9 billion in 1991 and to $ 85.4 billion by the end of March 1993. Put in rupee terms, the burden of debt has mounted thanks to devaluation from Rs.1.1Iakh crore in 1991 to Rs.2.66Iakh crore by March 1993 -a 142 percent increase in two years. In terms of ratio of total debt to GDP it was a growth from 14 per cent in 1980 to nearly 38 per cent in 1991. $132.1 billion (30 June 2006 est.)

Wire money online to India with Xoom.com for as low as $4.99.

The rate of growth is tremendous. To derive comfort from the EDT / GNP ratios of neighboring countries like Pakistan (50%), Bangladesh (56%), Sri Lanka (72.6%) or extreme cases like Mozambique (426%) or Tanzania (250.8%) for 1991 is irrelevant especially when we note that China’s ratio was only 16.4 per cent in 1991 and fell to 16% in 1992.

The increase in the magnitude of debt may be seen along with the changing profile of the structure of debt. Concessional finance which was as high as 87 per cent of total debt in 1970 has declined to 42 per cent in 1991. Loans from transnational banks, NRI deposits and IBRD loans (mostly with variable interest rates) constitute the major share of debt in recent periods.

Debt Trap
Debt per se is not an evil for any country especially when it is prudently managed and productively used. But it becomes a heavy burden when it falls into a growing debt trap and becomes pathologically dependent on debt for survival and growth. A country may be said to be in a debt trap when the total payment for debt services (IDS) (amortisation plus interest charges) exceeds the gross disbursements of loans flowing into a country. It means a reverse flow of resources. If the situation throws current account balances permanently out of gear due to poor export growth, declining terms of trade, increasing debt service burden etc. the country is in a sort of dependency syndrome. Available evidences suggest that India has become deeply dependent on debt despite the high foreign exchange build-up.

One need not ring any alarm bells if the export earnings expand fast enough in relation to the growth of total the While the total debt in nominal terms increased 3.5 times the increase in the value of exports of goods and services (XGS) was only 1.6 times. The EDT / XGS percentage which in 1980 was 136 rose to 294 in 1991. Fortunately with the growing FOREX RESERVE it is coming down.(2006 est.). India’s performance is dismal in terms of the ratio of total debt services (ID percentage of exports of goods and services (XGS). It is 30.7% for India in 1991 as against 19.9% for Bangladesh,21% for Pakistan and just 10.6% for Mozambique and an average of 21 % for low income countries as a whole. The only two countries which have higher ratios than India are Zambia and Indonesia among the 40 low income countries of the world. Those people who compare India with China liberalization may note that TDS /XGS ratio was as12% in 1991.

Report on Country’s External Debt

Criticism of the government’s economic compelled it, the ministry of finance in particular, some additional information on the performance of the economy. The latest case in point is the first-ever formal status the country’s external debt with a foreword by finance minister. The report is apparently intended to answer the widely-shared misgiving that the level of the country’s debt is now dangerously high.

The data contained in the report are not new, having already published in the Reserve Bank’s Annual Report 2005-2006. With a total external debt of $112.6 billion at the end of June 2004. In terms of international comparison, India ranks eighth among the top fifteen debtor countries of the world according to the Global Development Finance 2004, World Bank.

At the end of June 2004, India’s external debt was $112.6 billion. This can be broken up into long-term debt and short-term debt (less than one year). Long-term debt is $106.7 bn, while short-term debt is $5.9 bn. Since short-term debt has to be paid quickly, its share in total debt is a good indicator of how worrisome the debt position is. In March 1991, the share of short-term in total debt was 10.2%. Today, the figure is 5.2%.

Long-term debt has seven components: multilateral, bilateral, debt to IMF export credit, commercial debt, NRI deposits, rupee debt.

The debt increased in the 1990s primarily because of commercial debt and NRI deposits. It is not the case that there has been large borrowing on the government account. Indeed, India has repaid sovereign debt, both multilateral and bilateral, ahead of time. (There are costs associated with premature retirement.) For IMF purposes, India is now classified as a creditor country rather than a debtor country. Even within short-term debt, the debt is entirely trade-related. NRI deposits with maturity lower than one year have been phased out.

India’s external debt indicators compare well with that of other countries.

A prudent external sector policy, particularly in relation to external debt, pursued

since 1991 placed India’s external debt position at a comfortable level. The

Policy focus has been on concessional and relatively less expensive source of funds,

preference for long maturity loans, monitoring of short-term debt and emphasis on non-debt creating capital flows. Recent initiatives towards external debt moderation include,

inter alia, prepayment of costly Government and non-Government loans, rationalization of interest rates as well as structure of NRI deposits, end-use stipulations for ECB and restriction on trade credits. As regards external debt statistics, continuous efforts are being made to bring in refinement in coverage, classification, presentation and

Technological upgradation in the computation of external debt data.

India’s debt is in 23 different currencies. The composition is kept secret. Debt in 23 different currencies has to be converted into a common numeraire, like the US dollar, to allow comparisons. But this depends on the exchange rate and if the dollar depreciates, the apparent value of debt increases. Such valuation changes have contributed significantly to increasing both debt and forex figures. The confessional element in India’s debt is also fairly high, at around 35.8%.

The severity of indebtedness can be gauged by looking at debt stock indicators or debt flow indicators, the latter being more relevant for payment purposes. In both cases, different indicators are possible. For debt stock, a possible indicator is debt to GNP or GDP. As a thumb rule, more than 25% is cause for worry. India’s debt/GDP ratio was 17.6% in March 2004. In 2002, (international figures come with a lag), India’s debt/GNP ratio was 20.7%, compared with 52.5% in Brazil, or 80.3% in Indonesia.

India’s outstanding external debt, increased from US$105.4 billion at end-March 2003 to US$112.6 billion at end-March 2004, essentially because of a surge in NRI deposits. The NR (NR) RD scheme, which was not considered as part of external debt, was discontinued with effect from April 1, 2002. The provision that the maturity proceeds of NR (NR) RD could be credited into NR (E) RA –a part of external debt – together with flow back of a portion of redemption proceeds of Resurgent India Bonds (RIBs) resulted in larger inflows under NRI deposits during 2003-04. As per the latest available data, External debt stock rose to US$ 113.6 billion at end-September 2004, because of a rise in trade related credits reflecting larger import demand. Movement in key debt sustainability indicators point towards further consolidation of external debt during 2003-04. The total external debt to GDP ratio improved to 17.8% at end-March 2004. The proportion of short-term debt in total external debt declined from 4.8 % at end-March 2003 to 4.3 % as on March 31, 2004, which however rose to 5.7 % at end- September 2004 with a rise in import-related trade credits. Debt service payments as a proportion of current receipts rose in 2003-04 mainly due to exceptional transactions, namely, prepayments and redemption of RIBs.Excluding these one-off transactions, debt service ratio worked out to 10.4 % in 2003-04

Although India is the eighth most indebted country in the world (measured by total debt stock), there is no cause for alarm and, since 1999, the World Bank has classified India as a less indebted country, compared with its earlier classification as a moderately indebted country. For managing debt repayment flows (principal as well as interest), the debt service ratio is used as an indicator. This is debt repayment obligations (per year) divided by earnings from exports of goods or goods and services (current account receipts). Expressed as a share of current receipts, India’s debt service ratio is 18.3% now, compared with 35.3% in 1991.