The Hindu : Burden of external dept

Online edition of India's National Newspaper
Wednesday, Aug 28, 2002

Opinion

Opinion - Editorials

Burden of external dept

IT IS A source of some comfort that India's external debt continues to be at a stable level. According to the latest status paper prepared by the Union Finance Ministry, the stock of foreign debt stood at $98.4 billion at the end of December 2001. After a substantial increase of $16 billion between 1991 and 1995, partly on account of fresh loans and partly on account of exchange rate movements, the total debt has fluctuated between $93 billion and $99 billion since 1995.

Going by a number of indicators, India's external debt situation is far better today than it was during the balance of payments (BoP) crisis of 1991. While the absolute size of foreign debt is important, more relevant is the weight this debt imposes on the economy. And, on that count, the burden has become lighter and lighter, even as the stock of outstandings has remained more or less constant. Annual repayments of loans and interest as a percentage of current receipts — the debt service ratio — which was as high as 35 per cent in 1990-91 has fallen to 13 per cent today. Debt as a percentage of the gross domestic product has nearly halved since the early 1990s. And the short-term debt to GDP ratio, which crossed 10 per cent in 1990-91 and precipitated the BoP crisis of that year, has been held under 3 per cent. Overall, India is now classified by the World Bank as a "less" indebted country, which is two rungs below the extreme category of "severely" indebted countries, which is where Brazil, Argentina and Indonesia now belong. In absolute terms as well, India's position has improved globally. In the mid-1990s, India was the third largest debtor in the world; today it is ranked ninth. All this has taken place in spite of the fact that new loans are increasingly being raised on commercial rather than concessional terms as was the practice for decades. This improvement should be attributed both to a cautious policy on foreign borrowings (which includes annual caps on commercial loans which would not have been possible if the rupee was fully convertible) and to the steady growth in current receipts in the BoP.

There are, however, enough areas of concern which should prevent complacency and persuade the Government to go slow on capital account convertibility. The first is that while the short-term debt to GDP ratio was only 2.8 per cent at the end of 2001, the more accurate measure of immediate repayments — total debt of a residual maturity of one year — was 9 per cent of GDP in December 2001. This is still not a very heavy burden, but it is not something to be taken lightly. The second concern should be that the estimate of debt servicing in the years ahead (based on past borrowings) shows that there are going to be two major humps round the corner. In 2003-04 and 2005-06, repayments of the expensive Resurgent India Bonds and India Millennium Deposits fall due. Debt service in both years will then cross $12 billion. This will be the largest since 1995-96, though the Government hopes that not all the repayments will be repatriated. The third concern should be the impact of the Government's decision to make even the existing non-repatriable bank deposits by non-resident Indians fully payable in foreign exchange. As a consequence, two such schemes were discontinued last April and outstandings transferred to repatriable accounts where they will be held till maturity. The stock of deposits in one of these schemes was itself over $7 billion. This means that if these deposits are taken out of the country when they mature they will add to India's debt service burden. And if they are renewed they will add substantially to India's external debt burden. Either way, the Government's decision is going to have a negative impact on the BoP.

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