External Debt Development and

Management:
Presentations on India

Dr HK Pradhan
Professor of Finance and Economics
XLRI Jamshedpur
India

July 6-7, 2004

1990-91 Foreign Exchange Crisis

"When the new Government assumed office (June

1991) we inherited an economy on the verge of
collapse. Inflation was accelerating rapidly. The
balance of payments was in serious trouble. The
foreign exchange reserves were barely enough for two
weeks of imports. Foreign commercial banks had
stopped lending to India. Non-resident Indians were
withdrawing their deposits. Shortages of foreign
exchange had forced a massive import squeeze, which
had halted the rapid industrial growth of earlier years
and had produced negative growth rates from May
1991 onwards".
Finance Minister of India Dr Manmohan Singh’s Budget
1992-93 speech to the Parliament

1
 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 of
1990-91;
• How was India spared from the contagious
currency 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 third
debtor after Brazil and Mexico in 1991, to eighth in
2002 in the list of the top fifteen debtor countries

It needs to be noted here that..

External debt needs to be examined along with

the 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

2
External Debt Development Until
1970s
• External capital played a very insignificant role in
India’s 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, with
the deflationary stance of macroeconomic policies
• The second oil shock of 1979 could be relieved
using IMF loans:
– SDR 266 million under Compensatory Financing
Facility (CFF) in 1980,
– SDR 529.01 million under Trust Fund Loan (TFL) in
1980-81
– SDR 5 billion under Extended Fund Facility (EFF)
during 1981-84 (of which India used only SDR 3.9
billion).

3
 Developments Leading to 1990
Foreign Exchange Crisis
• Liberalization of the import control regime
since mid-80s, by raising commercial
loans/bonds from the eurocurrency markets
as well as accepting short term foreign
currency deposits
• Macroeconomic imbalances in the
economy, particularly in the form of
increasing domestic money supply and
budget deficits

1991 Foreign Exchange Crisis

• External debt at $ 83 billion in March 1991, 45 %
of which was contracted from private creditors
and 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

4
 Responding to Crisis
• Pursue macroeconomic reforms, under the
medium term structural adjustment program of
IMF
• Remain current on debt servicing by borrowing
from multilateral sources
• Sweeping changes were introduced in the areas of
trade and exchange rate policies
• Slow on Capital Account Convertibility
• India’s reform efforts since 1990s had led to a
resumption of growth, decline in inflation,
improved fiscal deficit, and a sustainable balance
of payments and external debt

1997 Asian Currency Crisis

• Had marginal impact on India, with
negligible impact on her foreign exchange
markets, the level of reserves and the
banking system
• Strong macroeconomic fundamentals,
Flexible exchange rate management and
control on short-term capital flows helped
India to withstand the currency crisis

5
 Selected Indicators of India's External Sector up to Asian Crisis
(% growth unless noted)

Item/Year 91-92 92-93 93-94 94-95 95-96 96-97 97-98

Growth of Exports -1.1 3.3 20.2 18.4 20.3 4.5 2.6

Growth of Imports -24.5 15.4 10 34.3 21.6 10.1 5.8

Exports / Imports 86.7 77.6 84.8 74.8 74 70.2 83.3

Reserves to Imports 5.3 4.9 8.6 8.4 6 6.6 7

Short-term debt/Reserves 76.7 64.5 18.8 16.9 23.2 25.5 19.8

Debt Service Ratio 30.2 27.5 25.6 26.2 24.3 21.4 18.3

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

External Debt* 41 39.8 35.8 32.3 28.2 25.9 23.8

Debt Service payments* 3.3 3.3 3.3 3.6 3.6 3.3 2.8

* As % of GDP

Spot USD-INR

6
110
NEER & REER of the rupee
100

90

80
REER
70

60

50

40
NEER
30
86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03
19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

Evolving Debt and Capital

Flows Towards 2003
• India’s 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 in
2003
• Debt service ratio which reached a record
level of over 35 per cent in 1990-91,
declined steadily to 14.7 per cent in 2003

7
 India's External Debt
End- End- End- End-
March Share in March Share in March Share March Share in
1991 Total 1996 Total 2001 in Total 2003 Total
(US $ External (US $ External (US $ External (US $ External
mn.) Debt mn.) Debt mn.) Debt mn.) Debt

Multilateral 20900 25 28616 31 31898 32 30558 27

Bilateral 14168 17 19213 20 15323 16 17942 16

IMF 2623 3 2374 3 0 0 0 0

Export Credit 4301 5 5376 6 5368 5 4773 4

Commercial
Borrowing 10209 12 13873 15 23227 24 20582 18

NRI Deposits* 10209 12 11011 12 17154 17 29867 27

Rupee Debt 12847 15 8233 9 3042 3 2635 2

Short-term Debt 8544 10 5034 5 2745 3 5773 5

Total External debt 83801 100 93730 100 98757 100 112130 100
Share of
Concessional Debt
to Total Debt 44.8 42.3 36 36.4

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

Debt Outstanding ($ Billion)

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9
 Indicators of Debt Sustainability for India
Year Solvency Indicators Liquidity Indicators
DSR ISR DGDP STD/TD STD/FER
1990-91 35.3 15.5 28.7 10.2 146.5
1991-92 30.2 13 38.7 8.3 76.7
1992-93 27.5 12.5 37.5 7 64.5
1993-94 25.4 10.5 33.8 3.9 18.8
1994-95 26.2 9.7 30.8 4.3 16.9
1995-96 24.3 8.8 27 5.4 23.2
1996-97 21.2 7.3 24.5 7.2 25.5
1997-98 19 7.5 24.3 5.4 17.2
1998-99 17.8 7.8 23.6 4.4 13.2
1999-00 16.2 7.3 22.1 4 10.3
2000-01 17.2 6.6 22.4 3.6 8.6
2001-02 13.9 5.4 21 2.8 5.1
2002-03 14.7 4.1 20.3 4.4 6.1

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

45
Debt Sustainability for India: Solvency Indicator
40

35

30

25

20

15

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0
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

10
 Debt Sustainability in India: Liquidity Indicators
160

140

120

100

80

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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

80
68.9
70
60
50
Percentage

40.2 40.8
40 32.8 33.9

30 22.5 23.1 23.2 25

20.2
18.3
20 14.9
11.3
7.3 8.2
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11
 Reserve Adequacy Indicators
Year Import Cover of Reserves to Reserves to Short Term
Reserves(months) External debt
Debt
1990-91 2.5 7 68.3
1991-92 5.3 10.8 130.4
1992-93 4.9 10.9 155.1
1993-94 8.6 20.8 530.9
1994-95 8.4 25.4 590
1995-96 6 23.1 430.8
1996-97 6.5 28.3 392.8
1997-98 6.9 31.4 582
1998-99 8.2 33.5 760.2
1999-00 8.2 38.7 966.4
2000-01 8.6 41.8 1,165.40
2001-02 11.3 54.8 1,971.10
2002-03 13.8 72 1,650.90
Source: Reserve Bank of India

120
Total External Debt and Foreign Currency Assets

100

80
US $ Billion

60

40

20

0
End End End End End End End End End End End End End End End
Mar 91 Mar 92 Mar 93 Mar 94 Mar 95 Mar 96 Mar 97 Mar 98 Mar 99 Mar 00 Mar 01 Mar 02 Dec 02 Mar 03 Dec 03

Total External Debt Foreign Currency Assets

12
 Composition to Capital Inflows in India
Types of Flows 1990- 1995- 1997- 1999- 2000- 2001- 2002-
91 96 98 00 01 02 03
Total Net Capital Inflows 7.1 4.1 9.8 10.4 10 10.6 12.1
($ bn)
Per cent
Non-debt Creating 1.5 117.5 54.8 49.7 67.8 77.1 46.6
Inflows
a) FDI 1.4 52.4 36.2 20.7 40.2 58 38.5
b) Portfolio Investment 0.1 65.1 18.6 29 27.6 19.1 8.1
Debt Creating Inflows 83.3 57.7 52.4 23.1 59.4 9.2 -10.6
a) External Assistance 31.3 21.6 9.2 8.6 4.3 11.4 -20
b) ECB # 31.9 31.2 40.6 3 37.2 -14.9 -19.4
c) Short- term Credits 15.2 1.2 -1 3.6 1 -8.4 8.1
d) NRI Deposits 21.8 27 11.4 14.7 23.1 26 24.6
e) Rupee Debt Service -16.9 -23.3 -7.8 -6.8 -6.2 -4.9 -3.9
Other Capital @ 15.2 -75.2 -7.2 27.2 -27.2 13.7 64
Total (1 to 3) 100 100 100 100 100 100 100
Memo: Excluding b & c* 84.7 33.7 82.4 67.4 71.4 89.3 83.8
Source: Reserve Bank of India

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

Short term Debt

Rupee Debt 5%
2%
NRI Deposit
27% Multilateral
28%

Commercial Debt
Bilateral
18%
Export Credit 16%
4%

13
 Outstanding Balances Under Various NRI Deposit Schemes (US $ million)
End-March NR(E)RA FCNR(A)* FCNR(B) NR(NR)RD** FC(O)N Total
1975 40 – – – – 40
1980 856 188 – – – 1,044
1985 2,304 770 – – – 3,074
1990 3,777 8,638 – – – 12,415
1995 4,556 7,051 3,063 2,486 10 17,166

1996 3,916 4,255 5,720 3,542 13 17,446

1997 4,983 2,306 7,496 5,604 4 20,393

1998 5,637 1 8,467 6,262 2 20,369

1999 6,045 – 7,835 6,618 – 20,498

2000 6,758 – 8,172 6,754 – 21,684

2001 7,147 – 9,076 6,849 – 23,072

2002 8,449 – 9,673 7,052 – 25,174

2003 14,923 – 10,199 3,407 – 28,529

*: Withdrawn Effective August 1994

Portfolio Investments in India (US $ Million)

GDRs/ADRs# FIIs* Offshore funds Total
1992-93 240 1 3 244
1993-94 1,520 1,665 382 3,567
1994-95 2,082 1,503 239 3,824
1995-96 683 2,009 56 2,748
1996-97 1,366 1,926 20 3,312
1997-98 645 979 204 1,828
1998-99 270 -390 59 -61
1999-00 768 2,135 123 3,026
2000-01 831 1,847 82 2,760
2001-02 477 1,505 39 2,021
2002-03 600 377 2 979

14
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15
 International Comparison-Proportion of Short Term Debt to Total External Debt, 2002
China 28.5
Thailand 20.1

Indonesia 17.6

Malaysia 17.2

Hungary 16.2

Poland 12.8

Turkey 11.5

Argentina 11.2
Columbia 11.2
Russian Fed 11.1

Brazil 10.3
Phillipines 9.4
Chile 9.0
Mexico 7.0

India 4.4

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Percent

International Comparison-Proportion of Short Term External Debt to Total Foreign Exchange Reserves,
2002
160
141.4
140

120

100
P e rc e nt

80 72.8

51.8 54.6 53.6

60
35 34.4 33.8
40 30.6 29.8
24.5 24.2
19.5 16.1
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16
 India’s Short Term External Debt by Residual Maturity
(US $ million)
1998 1999 2000 2001 2002

Short-term debt by original maturity 5,046 4,274 3,936 3,628 2,745

-5.4 -4.4 -4 -3.6 -2.8

Long-term debt maturing within one year 6,723 7,059 8,359 6,767 11,465

-7.2 -7.3 -8.5 -6.7 -11.6

Total Short-term debt by residual maturity 11,76 11,333 12,295 10,395 14,210
9
-12.6 -11.7 -12.5 -10.3 -14.4

Government Guaranteed External Debt($ Millions)

1994 1996 1998 1999 2001 2002 2003

1 Govt. Debt 55943 53095 46520 46137 44027 43619 45647
2 Non-Govt Debt 36752 40635 47011 50749 57105 55138 66483
Total External
3
Debt(1+2) 92695 93730 93531 96886 101132 98757 112130
of which with
4 Govt.Guarantee*:
(a+b+c) 10568 8545 7269 7174 6315 7022 6851
a. Financial Sector 1709 1098 2323 2496 1429 1761 1807
b. Public Sector 8533 7070 4605 4363 4639 5070 4985
c.Private Sector 326 377 341 315 247 191 59
Govt. Debt and
5
Guaranteed Debt(1+3) 66511 61640 53789 53311 50342 50641 52498
Percent of Govt.Debt
6 and Guaranteed Debt to
Total External Debt(5/4) 71.8 65.8 57.5 55.0 49.8 51.3 46.8
Percent of Govt.
7 Guaranteed Debt to
Non-Govt Debt(3/2) 28.8 21.0 15.5 14.1 11.1 12.7 11.0

17
 12
Government Guaranteed External Debt
10.57 10.73

10

8.17
8 7.27 7.17 6.98 7.02 6.85
6.46 6.53
U S $ B illio n

6.32

0
Mar-94 Mar-95 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Dec-02 Dec-03

90
PPG to Total Debt
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18
 Policy Perspectives from India’s External
Debt Management
Rangarajan Committee(1993)
• Adoption of transparent policies and
procedures that helps economic agents to better
plan their activities and minimize risk and cost.
• Debt management strategy is an integral part
of the sound macro economic policies, which
acts as the first line of defense against any
financial crisis.
• Policy actions also need to reflect concerns
emerging from the interface between domestic
and global economic environment.

Policy Perspectives…
• Management of sovereign external debt is
closely related to the management of
domestic debt, which in turn depends on the
management of overall fiscal deficit.
• Conscious build-up of foreign exchange
reserves to provide effective insurance
against external sector uncertainties
•

19
 Policy Perspectives…
Medium term projection of debt service payments
without 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 monitoring
unit
• Computerization using CS-DRMS(2000+ is in the
process)
• 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

20
 Policies Relating to ECBs
• Continuation of an annual cap, minimum maturity
restrictions and prioritizing the use of ECBs;
• LIBOR based ceilings on interest rates and
minimum maturity requirements on NRI deposits
to discourage the volatile component of such
deposits;
• Containment of short-term debt together with
controls to prevent its undue increase in future;
• retiring/ restructuring/ refinancing of more
expensive external debt;

Policy Perspectives…
• Cautious approach towards capital account
convertibility, with due regard to the
strength of the domestic fiscal and financial
situations.
• 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;

21
Thank You

22