The Hindu : Opinion / Editorials : DEBT AND RESERVES

Online edition of India's National Newspaper
Wednesday, Apr 21, 2004

Opinion

Opinion - Editorials

DEBT AND RESERVES

FOREIGN EXCHANGE RESERVES, which in the week ending April 9 increased to $116 billion, have crossed a new milestone. They are now more than the country's external debt, which, according to the latest estimates by the Finance Ministry, stood at $112 billion at the end of December 2003. India therefore has adequate dollar reserves to clear, if need be, all the loans it owes the rest of the world. For a country that traditionally has had to live a hand-to-mouth existence in its balance of payments, this is a complete turnaround in fortunes in less than 15 years. The reserves to debt ratio was as low as 7 per cent in 1990-91, the year of the last balance of payments crisis. Through the 1990s this steadily rose, with a sharp acceleration in the past couple of years following a flood of foreign exchange inflows. India is only the second country in the developing world (China was the first) to enjoy the luxury of possessing reserves that exceed the value of external debt. The problem is no longer coping with debt; it is dealing with the cost of holding burgeoning reserves.

India continues to be among the ten largest debtors in the world. However, while the nominal value is large, what matters is the burden on the economy and the ability to meet annual debt service payments. In this respect India is far better placed than countries like Brazil, Russia and Turkey that have foreign loans adding up to more than $100 billion. Its debt to gross domestic product ratio stood at just 21 per cent in March 2002, compared with 53 per cent for Brazil. This indicator of the real burden of debt has been showing an improvement from the mid-1990s. From 31 per cent in 1995, it declined to 21 per cent in 2002 and further to 20 per cent in 2003. The burden of repayment too has become lighter. Annual debt service as a percentage of earnings in the balance of payments has come down from 26 in 1995 to 16 in 2003. The composition of outstanding loans too has remained healthy. While the weight of short-term loans in debt has been fluctuating in recent years, its current value of 6 per cent is well below the level that would make the Indian economy vulnerable to a sudden outflow of capital.

There are at the same time a couple of puzzles in the rising nominal dollar value of debt. India's external debt rose by $6.88 billion or 6.5 per cent between December 2002 and December 2003, though it remained more or less the same in the last quarter of 2003. Multilateral loans worth over $2 billion were pre-paid in 2002-03 and more than $3 billion the following fiscal year. Yet external debt has risen. The depreciation of the dollar during this period must have contributed to the increase but that was not the only reason. There have been substantial fresh borrowings, the largest contribution coming from bank deposits by non-resident Indians. Long-term NRI bank deposits rose by more than $7 billion in 2003. This was in part the result of deposits moving from non-repatriable rupee schemes (which were closed in 2003) to repatriable dollar accounts and from the Resurgent India Bonds to NRI bank deposits. It is, however, legitimate to ask if the economy should continue to seek such debt-creating foreign capital. The NRIs are estimated to hold 60 per cent of India's debt to foreign private capital. These loans now account for 26 per cent of total debt, which is just a shade less than the 27 per cent share of multilateral loans. This is an unhealthy level of dependence on a single source of funds, which, in the past, has shown itself to be quite fickle.

Printer friendly page
Send this article to Friends by E-Mail

Opinion

News Update

Stories in this Section

DEBT AND RESERVES

SAFETY AUDIT FOR AIRCRAFT

Cyprus: can it put its past behind?

The other side of the story