Sep 02, 2002
Creditable progress on external debt
S. Venkitaramanan
IT WAS in 1993 that India started presenting a Status Report on external debt. The latest Status Report, which keeps up the standard of excellence, is a clear record of India's able management on the external front.
The various "debt indicators" have improved substantially in the period since the crisis of 1990-91. While the gross external debt increased from $83.8 billion to $98.4 billion in the last decade, the debt service ratio declined from 35.3 per cent of gross external receipts to 13.0 per cent in December 2001.
Put another way, the country met its debt service obligations by less than one-seventh of its current receipts at the end of December 2001, as against one-third in 1991. Similarly, the ratio of debt to GDP declined from a high of 38.7 per cent in 1991-92 to 20.7 per cent at end-December 2001.
Important among the reasons for the improvement in these indicators is the increase in external current receipts, thanks mainly to invisibles. As a whole, the current account has improved, almost reaching a balance in recent years. The growth of the gross national product in recent years has also led to the reduction of relevant ratio of external debt to GDP.
The World Bank classifies countries into three main categories — "severely indebted"," moderately indebted" and "less indebted". Since 1999, India has graduated to a position as a "less indebted country". The relative rankings amongst the debtor countries of the world also signify our improvement.
Whereas in 1991, India ranked third among indebted countries, after Brazil and Mexico, it improved to the ninth rank in 2000. India's external debt indicators, such as short-term debt to total debt and short-term debt to forex reserve ratio, are among the lowest among the debtor countries. India's debt to GNP ratio was the second lowest after China. According to the World Bank's Global Development Finance, the total external debt of India in 2000 was $100.4 billion, compared to $238.0 billion of Brazil, $149.8 billion of China, $160.3 billion of Russian Federation and $141.8 billion of Indonesia.
The "present value" of debt is a measure that reflects the extent of concessionality. It is calculated by discounting the future stream of debt service payments on individual loans by appropriate discount rates and aggregating such present value for all loans. The present value of total external debt of India is calculated at $70.9 billion, despite higher stock in absolute terms of $100.4 billion. This reflects the fact that India's concessional loans amount to 43.7 per cent of total debt. The ratio of present value of debt in relation to GNP for India is 16 per cent, compared to 36 per cent for Brazil, 33 per cent for Mexico and South Korea, 45 per cent for Pakistan, 55 per cent for Argentina, 111 per cent for Indonesia, 13 per cent for China and 66 per cent for Thailand.
The ratio of the present value to current receipts for India is at 105 per cent, while Brazil has 346 per cent, Argentina 425 per cent and China 54 per cent. It was in respect of certain benchmarks in regard to these indicators that India has been classified as a "less indebted country", compared to the earlier classification as "moderately indebted".
India's graduation from the category "moderate" to "less indebted" reflects the improvement in the debt indicators compared to the benchmarks. This compares with the deterioration of our immediate neighbour Pakistan from "moderately indebted" in 1995 to "severely indebted" in recent years.
Another important indicator of external debt is the proportion of short-term debt, which increases the vulnerability from the BoP point of view, as it did in 1991. In that year, it was the short-term obligations, and the need to roll them over, which created a crisis of confidence. The Government and the RBI have, since then, rightly focussed their efforts on reducing India's exposure to short-term external debt.
Whereas short-term debt stood at $8.5 billion in March 1991, it declined to $2.75 billion by end-December 2001, reflecting India's prudent policy. India's ratio of short-term debt to total debt stands at 3.5 per cent compared to China's at 11.5 per cent, Malaysia's at 11.1 per cent and Korea's at 30.1 per cent. India's ratio of short-term debt to reserves is also better than others at 8.4 per cent, compared to China's 10 per cent and Korea's 42 per cent. The only question is whether we have been too conservative.
In keeping with the Government's restrictive policy on private external debt, the report shows that the share of official creditors in external debt remains high at 51.6 per cent, against a share of private creditors at 48.4 per cent. This compares with 63.5 per cent for official creditors in 1991. Government debt as a proportion of overall debt declined from around 60 per cent at the beginning of the decade to 43.9 per cent at the end of December 2001.
Turning to the currency composition of India's external debt, the status report points out that it is heavily weighted in terms of US dollars. Dollar-denominated debt accounted for 55 per cent of the total debt at the end of December 2001, compared with 41.4 per cent at end-March 1994. This reflects the increasing denomination of debt rates, either for US dollars or for US dollar-related currencies.
While debt service payments have varied over the years, they peaked at $13.0 billion in 1995-96. Since then, the debt service has been maintaining a steady level at around $12 billion. This compares with the average level of $8-10 billion per year in previous years. Of this, principal repayments alone account for around $8.3 billion, and interest for $3.8 billion.
It is significant that the debt service ratio as a percentage of current receipts of the country stood at 15.4 per cent in 2000-01, compared to the high figure of 35.3 per cent in 1990-91. In terms of the debt service ratio also, India's position in the international community stands at a creditable level.
The figure of external debt service payment to current receipts for India, at 12.8 per cent, compares favourably with that of Argentina (71.3 per cent), Brazil (90.7 per cent), and Indonesia (25.3 per cent). Countries with significantly lower figures than ours are Malaysia (5.3 per cent), China (7.4 per cent), and Korea (10.9 per cent).
The status report incorporates a useful projection of debt service over the next 10 years, calculated as debt service obligations arising out of the currently disbursed debt. Expected are "humps" in debt service payments in 2003-04 of $12.5 billion and in 2005-06 of $12.2 billion, mainly due to redemption of Resurgent India Bonds and India Millennium Deposits. The status report notes, however, that a substantial part of these bonds could either be transferred in favour of residents or could be reinvested in the form of NRI deposits. The actual debt service may not turn out to be as burdensome as the figure apparently indicates.
The outstanding external commercial borrowing as at the end of 2001-02 stood at roughly $29.8 billion compared to $15.5 billion in 1991-92, reflecting the relatively liberal approach adopted in recent years.
The status report also notes the substantive changes in regard to dealing with NRI deposits consequent on the improved forex position.
In keeping with the trend of liberalisation of foreign exchange management, the Government also declared in the last Budget that non-resident deposits have been made convertible. This has come along with the termination of certain NRI deposit schemes, which have proved either too costly or unsustainable. Exchange guarantees earlier provided by the RBI on these deposits have also been discontinued.
The status report highlights the efforts taken to repay the higher-cost debt, as a result of which nearly $702.82 billion has been repaid in 2001-02 and 2002-03.
Turning to the break-up of external debt between Government and non-Government borrowing, the report gives the debt service payments on Government account as separate from those on private account. Importantly, it shows that the debt service payment will decline from 2005-06 steadily. During the next 10 years, $24.9 billion will be repaid, accounting for 61.5 per cent of total Government debt.
The status report takes legitimate pride in the achievement of stability and enhanced credibility on the debt front, notching up gains in relative rankings among global debtors. It is another question whether in pursuit of safety, policy-makers may have been unduly conservative, compared even to such countries as China and Korea. The future alone can tell. On the whole, the status report reflects a credible and creditable performance by India's authorities on the management of debt on the external front. A desirable blend of caution and legitimate risk-taking has guided the policies during the decade since the crisis of 1991. It is to be hoped that this will lead to a higher level of confidence in India's economy by the international financial community in the coming years and enhance the inflow of foreign capital flow of the non-debt-creating kind.
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