The Hindu : MANAGEABLE EXTERNAL DEBT

Online edition of India's National Newspaper
Saturday, Feb 21, 2004

Opinion

Opinion - Editorials

MANAGEABLE EXTERNAL DEBT

RECENT OFFICIAL STATUS reports on the country's external debt have generally been upbeat. Along with the better-publicised success stories about the rising foreign exchange, they have lent credence to perceptions that the external economy is robust. Few can refute the Government's claim that the debt situation is eminently manageable. Even the occasional sharp jumps in the aggregate external debt ought to be viewed as the logical consequence of certain policy measures intended to benefit the economy as a whole. External debt grew from $98.76 billion in March 2002 to $105 billion a year later and to $112.5 billion by September 2003. A major portion of the increase was attributed to the growth in non-resident Indian deposits, which during the first nine months of 2002 accounted for $5.1 billion of the $6.3 billion incremental external debt. Such an extraordinary increase was due to the policy decision to do away with two popular NRI schemes — the Non-Resident (non-repatriable) Rupee Deposit and the Non-Resident Special Rupee Deposit Schemes from April 2002. Once these deposits became repatriable albeit at a lower interest rate, they added to the external debt. But the move was justified for there was a clear need to reduce the interest rates, and to moderate the yield expectations of NRIs from Indian investments (a process that has gained momentum recently).

Above all, decisions such as the one to reclassify liabilities under the NRI deposits are rooted in growing confidence in the external economy. The burgeoning reserves, now past $106 billion, have enabled the Government to look at other policy options such as retiring multilateral debt prematurely and permitting Indian companies to refinance their costly external borrowings. The confidence is also justified on the basis of comparisons with other countries. There has been a marked improvement in India's standing in just over a decade. In 1991 India ranked just behind Brazil and Mexico in a list of the most indebted nations. Today it is at a relatively comfortable ninth spot. Moreover, based on certain universally accepted parameters, India's external debt is not a cause for concern. As a proportion of the gross national product, the country's debt is the lowest (20.5 per cent in 2001) after China's (15 per cent). Again as a proportion of the Gross Domestic Product, it has shrunk markedly over the years. The country has one of the most impressive records among all major countries in terms of per capita debt and one of the lowest debt-service coverage ratios. Significantly, the jump in external reserves has been due to non-debt creating inflows. Between March 1991 and September 2003 while forex reserves increased by $85.3 billion the addition to external debt was only $28.7 billion.

The only troubling feature is the way the country's short-term debt has been evaluated. The conventional definition is that short-term debt includes only those loans that have a maturity of less than one year at the time of contract. As on December 2002 the total short-term debt of $3,357 million by original maturity accounted for just 3.2 per cent of the country's overall external debt of $104,987 million. However, as the status report points out, estimates based on the original maturity concept are not realistic. To obtain a correct assessment, one has to take into account the portion of long-term and medium-term credit, which, although contracted for periods exceeding one year, are to be redeemed within the year. Apart from being more accurate, the residual maturity concept will enable the authorities to monitor liquidity risks and the debt-service coverage.

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