8/7/2019 10_india_ppt

1/22

Dr HK Pradhan

Professor of Finance and Economics

XLRI Jamshedpur

India

July 6-7, 2004

External Debt Development and

Management:Presentations on India

"When the new Government assumed office (June1991) we inherited an economy on the verge ofcollapse. Inflation was accelerating rapidly. The

balance of payments was in serious trouble. Theforeign exchange reserves were barely enough for twoweeks of imports. Foreign commercial banks hadstopped lending to India. Non-resident Indians werewithdrawing their deposits. Shortages of foreignexchange had forced a massive import squeeze, whichhad halted the rapid industrial growth of earlier yearsand had produced negative growth rates from May1991 onwards".

1990-91 Foreign Exchange Crisis

Finance Minister of India Dr Manmohan Singhs Budget1992-93 speech to the Parliament

8/7/2019 10_india_ppt

2/22

Issues

History of external debt and capital flows in India How is that the third world debt crisis of early 80s

had a little impact on India;

Reasons for the massive foreign exchange crisis of1990-91;

How was India spared from the contagiouscurrency crisis of 1997;

How has India managed very successfully her

external debt and capital flows since early 1990s Which has improved her rank from what was thirddebtor after Brazil and Mexico in 1991, to eighth in2002 in the list of the top fifteen debtor countries

It needs to be noted here that..

External debt needs to be examined along withthe developments in external sector and capital

flows, the overall trade regime involving trade

restrictions, export subsidisation and exchange

controls; and the overall macroeconomic

policies, which would govern to a large extent

the behaviour of external debt and its

sustainability

8/7/2019 10_india_ppt

3/22

External Debt Development Until

1970s

External capital played a very insignificant role in

Indias development process

Industrialisation strategy adopted since the 1950s

emulated an import substituting trade regime

Current account deficit was as low as 1.2 per cent

in 1970, matching the availability of external

finance, most of which were contracted from the

official creditors and at concessional interest rates

Responding to Oil Shocks

India responded to the first oil shock of 1973, withthe deflationary stance of macroeconomic policies

The second oil shock of 1979 could be relievedusing IMF loans: SDR 266 million under Compensatory Financing

Facility (CFF) in 1980,

SDR 529.01 million under Trust Fund Loan (TFL) in1980-81

SDR 5 billion under Extended Fund Facility (EFF)during 1981-84 (of which India used only SDR 3.9billion).

8/7/2019 10_india_ppt

4/22

Developments Leading to 1990

Foreign Exchange Crisis

Liberalization of the import control regimesince mid-80s, by raising commercialloans/bonds from the eurocurrency marketsas well as accepting short term foreigncurrency deposits

Macroeconomic imbalances in theeconomy, particularly in the form ofincreasing domestic money supply andbudget deficits

1991 Foreign Exchange Crisis

External debt at $ 83 billion in March 1991, 45 %

of which was contracted from private creditorsand at variable interest rates

Debt service ratio reached 30 percent ( Indonesia

31%, Mexico 28 %, and Turkey 28%).

Interest components alone was 50 per cent of the

total current account deficits and 21 per cent of the

total merchandise exports

Foreign exchange reserves fell to less than $1bn

8/7/2019 10_india_ppt

5/22

Responding to Crisis Pursue macroeconomic reforms, under the

medium term structural adjustment program ofIMF

Remain current on debt servicing by borrowingfrom multilateral sources

Sweeping changes were introduced in the areas oftrade and exchange rate policies

Slow on Capital Account Convertibility Indias reform efforts since 1990s had led to a

resumption of growth, decline in inflation,improved fiscal deficit, and a sustainable balanceof payments and external debt

1997 Asian Currency Crisis

Had marginal impact on India, with

negligible impact on her foreign exchangemarkets, the level of reserves and thebanking system

Strong macroeconomic fundamentals,

Flexible exchange rate management and

control on short-term capital flows helped

India to withstand the currency crisis

8/7/2019 10_india_ppt

6/22

2.83.33.63.63.33.33.3Debt Service payments*

23.825.928.232.335.839.841External Debt*

-1.5-1-1.8-1.1-0.4-1.8-0.4Current Account Balance*

18.321.424.326.225.627.530.2Debt Service Ratio

19.825.523.216.918.864.576.7Short-term debt/Reserves

76.668.48.64.95.3Reserves to Imports

83.370.27474.884.877.686.7Exports / Imports

5.810.121.634.31015.4-24.5Growth of Imports

2.64.520.318.420.23.3-1.1Growth of Exports

97-9896-9795-9694-9593-9492-9391-92Item/Year

Selected Indicators of India's External Sector up to Asian Crisis(% growth unless noted)

* As % of GDP

Spot USD-INR

8/7/2019 10_india_ppt

7/22

NEER & REER of the rupee

30

40

50

60

70

80

90

100

110

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

REER

NEER

Evolving Debt and CapitalFlows Towards 2003

Indias external $ 112.1 billion stood at the

end of December 2003 External debt to GDP declined from its peak

of 38.7 per cent in 1990-91 to 20 percent in2003

Debt service ratio which reached a recordlevel of over 35 per cent in 1990-91,declined steadily to 14.7 per cent in 2003

8/7/2019 10_india_ppt

8/22

36.43642.344.8

Share of

Concessional Debt

to Total Debt

100112130100987571009373010083801Total External debt

557733274555034108544Short-term Debt

2263533042982331512847Rupee Debt

2729867171715412110111210209NRI Deposits*

1820582242322715138731210209

Commercial

Borrowing

44773553686537654301Export Credit

00003237432623IMF

1617942161532320192131714168Bilateral

2730558323189831286162520900Multilateral

Share inTotal

ExternalDebt

End-March2003

(US $mn.)

Sharein Total

ExternalDebt

End-March2001

(US $mn.)

Share inTotal

ExternalDebt

End-March1996

(US $mn.)

Share inTotal

ExternalDebt

End-March1991

(US $mn.)

India's External Debt

Source: Indias External Debt : A Status Report, Government of India, 2003.

Debt Outstanding ($ Billion)

0

50

100

150

200

250

Malay

sia

Colombia Ch

ile

Thail

and

Philip

pines

Korea,

RepPo

land

Turk

eyCh

ina

Russ

ianFe

Arge

ntin

Indon

esia

India

Mex

icoBr

azil

1990 2001

8/7/2019 10_india_ppt

9/22

External Debt to National Income

0

20

40

60

80

100

120

Russ

ianFe

Korea,

Rep China

Brazil

India

Turkey

Thailan

d

Malaysi

a

Mexic

o

Colombi

a

Arge

ntina

Indonesi Chi

le

Philip

pines

Poland

1990 2001

Concessional Debt to Total Debt (%)

0

5

10

15

2025

30

35

40

45

50

Russ

ianFe

Arge

ntin

Mexic

oCh

ile

Braz

il

Colombia

Poland

Korea,Rep

Malay

sia

Turkey

Thailand

China

Philip

pine

s

Indo

nesia

India

1990 2001

8/7/2019 10_india_ppt

10/22

6.14.420.34.114.72002-03

5.12.8215.413.92001-028.63.622.46.617.22000-01

10.3422.17.316.21999-00

13.24.423.67.817.81998-99

17.25.424.37.5191997-98

25.57.224.57.321.21996-97

23.25.4278.824.31995-96

16.94.330.89.726.21994-95

18.83.933.810.525.41993-94

64.5737.512.527.51992-93

76.78.338.71330.21991-92146.510.228.715.535.31990-91

STD/FERSTD/TDDGDPISRDSR

Liquidity IndicatorsSolvency IndicatorsYear

Indicators of Debt Sustainability for India

DSR = Debt Service Ratio; ISR = Interest Service Ratio; DGDP = Debt to Gross Domestic

Product Ratio; STD = Short-Term Debt; TD = Total Debt; FER = Foreign Exchange Reserves.

Source : Reserve Bank of India

Debt Sustainability for India: Solvency Indicator

0

5

10

15

20

25

30

35

40

45

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

DSR ISR DGDP

8/7/2019 10_india_ppt

11/22

Debt Sustainability in India: Liquidity Indicators

0

20

40

60

80

100

120

140

160

1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03

STD/TD STD/FER

International Comparison of Debt Service Ratio, 2002

7.3 8.211.3

14.918.3

20.222.5 23.1 23.2

25

32.8 33.9

40.2 40.8

68.9

0

10

20

30

40

50

60

70

80

Mala

ysia

China

Russ

ianFed

.India

Arge

ntina

Philip

ines

Polan

d

Thail

and

Mex

ico

Indo

nesia

Chile

Hung

ary

Columb

ia

Turkey

Braz

il

Pe

rcentage

8/7/2019 10_india_ppt

12/22

Source: Reserve Bank of India

1,650.907213.82002-03

1,971.1054.811.32001-02

1,165.4041.88.62000-01

966.438.78.21999-00760.233.58.21998-99

58231.46.91997-98

392.828.36.51996-97

430.823.161995-96

59025.48.41994-95

530.920.88.61993-94

155.110.94.91992-93

130.410.85.31991-92

68.372.51990-91

Reserves to Short Term

debt

Reserves to

External

Debt

Import Cover of

Reserves(months)

Year

Reserve Adequacy Indicators

Total External Debt and Foreign Currency Assets

0

20

40

60

80

100

120

End

Mar 91

End

Mar 92

End

Mar 93

End

Mar 94

End

Mar 95

End

Mar 96

End

Mar 97

End

Mar 98

End

Mar 99

End

Mar 00

End

Mar 01

End

Mar 02

End

Dec 02

End

Mar 03

End

Dec 03

US$B

illion

Total External Debt Foreign Currency Assets

8/7/2019 10_india_ppt

13/22

Source: Reserve Bank of India

83.889.371.467.482.433.784.7Memo: Excluding b & c*

100100100100100100100Total (1 to 3)

6413.7-27.227.2-7.2-75.215.2Other Capital @

-3.9-4.9-6.2-6.8-7.8-23.3-16.9e) Rupee Debt Service

24.62623.114.711.42721.8d) NRI Deposits

8.1-8.413.6-11.215.2c) Short- term Credits

-19.4-14.937.2340.631.231.9b) ECB #

-2011.44.38.69.221.631.3a) External Assistance

-10.69.259.423.152.457.783.3Debt Creating Inflows

8.119.127.62918.665.10.1b) Portfolio Investment

38.55840.220.736.252.41.4a) FDI

46.677.167.849.754.8117.51.5Non-debt Creating

Inflows

Per cent

12.110.61010.49.84.17.1Total Net Capital Inflows($ bn)

2002-

03

2001-

02

2000-

01

1999-

00

1997-

98

1995-

96

1990-

91

Types of Flows

Composition to Capital Inflows in India

Composition of External Debt as at End Dec 2003 (Share in %)

Multilateral

28%

Bilateral

16%Export Credit

4%

Commercial Debt

18%

NRI Deposit

27%

Rupee Debt

2%

Short term Debt

5%

8/7/2019 10_india_ppt

14/22

8/7/2019 10_india_ppt

15/22

Short Term Debt to Total Debt

0

5

10

15

20

25

30

35

Colomb

ia

India

Malays

ia

Philip

pine

s

Mexico

Indo

nesia

Argentin

a

China

Chile

Turkey

Poland

Brazil

Russ

ianFeThaila

nd

Korea,Re

p

1990 2001

Short Term Debt to Reserves

0

100

200

300

400

500

600

Malay

sia

Colom

biaCh

inaCh

ile

Thail

and

Korea,

Rep

Indon

esia

Turkey

Mexic

o

Polan

d

Arge

ntina

Braz

ilIndia

Philip

pines

Russ

ianFe

1990 2001

8/7/2019 10_india_ppt

16/22

International Comparison-Proportion of Short Term Debt to Total External Debt, 2002

4.4

7.0

9.0

9.4

10.3

11.1

11.2

11.2

11.5

12.8

16.2

17.2

17.6

20.1

28.5

0.0 5.0 10.0 15.0 20.0 25.0 30.0

India

Mexico

Chile

Phillipines

Brazil

Russian Fed

Columbia

Argentina

Turkey

Poland

Hungary

Malaysia

Indonesia

Thailand

China

Percent

International Comparison-Proportion of Short Term External Debt to Total Foreign Exchange Reserves,

2002

141.4

72.8

51.8 54.6 53.6

35 34.4 33.8 30.6 29.824.5 24.2

19.5 16.1

6.4

0

20

40

60

80

100

120

140

160

Arge

ntin

Indo

nesi

Braz

il

Hung

a r

Turk

e

Colu

mbi

Phili

pine

R

ussia

n Fe

Tha i

lan

Pola

nCh

ile

Mala

ysi

Mex i

coCh

inIn

dia

P

e

rce

n

t

8/7/2019 10_india_ppt

17/22

-14.4-10.3-12.5-11.7-12.6

14,21010,39512,29511,33311,76

9

Total Short-term debt by residual maturity

-11.6-6.7-8.5-7.3-7.2

11,4656,7678,3597,0596,723Long-term debt maturing within one year

-2.8-3.6-4-4.4-5.4

2,7453,6283,9364,2745,046Short-term debt by original maturity

20022001200019991998

Indias Short Term External Debt by Residual Maturity

(US $ million)

Government Guaranteed External Debt($ Millions)

11.012.711.114.115.521.028.8

Percent of Govt.

Guaranteed Debt to

Non-Govt Debt(3/2)

7

46.851.349.855.057.565.871.8

Percent of Govt.Debt

and Guaranteed Debt to

Total External Debt(5/4)

6

52498506415034253311537896164066511

Govt. Debt and

Guaranteed Debt(1+3)5

59191247315341377326c.Private Sector

4985507046394363460570708533b. Public Sector

1807176114292496232310981709a. Financial Sector

68517022631571747269854510568

of which with

Govt.Guarantee*:

(a+b+c)

4

1121309875710113296886935319373092695

Total External

Debt(1+2)3

66483551385710550749470114063536752Non-Govt Debt2

45647436194402746137465205309555943Govt. Debt1

2003200220011999199819961994

8/7/2019 10_india_ppt

18/22

Government Guaranteed External Debt

10.57 10.73

8.17

7.27 7.176.98

6.32

7.02

6.46 6.536.85

0

2

4

6

8

10

12

Mar-94 Mar-95 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Dec-02 Dec-03

US$Billion

PPG to Total Debt

0

10

20

30

4050

60

70

80

90

Thail

and

Korea,

Rep.

Chile

Indon

esia

Mexic

oBr

azil

Arge

ntina

Malay

sia

Philip

pines

Turkey

Polan

d

Russ

ianFe

dCh

ina

India

Colom

bia

1990 2001

8/7/2019 10_india_ppt

19/22

Adoption of transparent policies andprocedures that helps economic agents to betterplan their activities and minimize risk and cost.

Debt management strategy is an integral partof the sound macro economic policies, whichacts as the first line of defense against any

financial crisis. Policy actions also need to reflect concerns

emerging from the interface between domesticand global economic environment.

Policy Perspectives from Indias External

Debt Management

Rangarajan Committee(1993)

Policy Perspectives

Management of sovereign external debt is

closely related to the management ofdomestic debt, which in turn depends on themanagement of overall fiscal deficit.

Conscious build-up of foreign exchangereserves to provide effective insuranceagainst external sector uncertainties

8/7/2019 10_india_ppt

20/22

Policy Perspectives

Medium term projection of debt service paymentswithout any bunching

Future focus is on building debt sustainability

benchmarks for the sovereign external debt by linking

with:

Domestic debt for fiscal sustainability

Total external debt for BOP sustainability

Contingent external liability for extreme case

scenario

Policies Relating to ECBs

Dissemination of Quarterly debt statistics

EDMU with MOF functioning as apex monitoringunit

Computerization using CS-DRMS(2000+ is in theprocess)

Compilation of all short term debt(NRI Deposits,Trade credits, FII in G-Secs, and residual maturity,etc)

Allowing risk management in sovereign debt

Focus on Contingent Liabilities

8/7/2019 10_india_ppt

21/22

Continuation of an annual cap, minimum maturityrestrictions and prioritizing the use of ECBs;

LIBOR based ceilings on interest rates andminimum maturity requirements on NRI depositsto discourage the volatile component of suchdeposits;

Containment of short-term debt together with

controls to prevent its undue increase in future; retiring/ restructuring/ refinancing of more

expensive external debt;

Policies Relating to ECBs

Policy Perspectives

Cautious approach towards capital account

convertibility, with due regard to the

strength of the domestic fiscal and financialsituations.

Needs caution on short term external debt

flows, non-resident deposits,and portfolio

flows

Measures to encourage non-debt creating

financial flows such as foreign direct and

portfolio investments;

8/7/2019 10_india_ppt

22/22

Thank You