Management of External Debt in India: DR Tarun Das Economic Adviser

Management of
External Debt in India
Presented by
Dr Tarun Das
Economic Adviser
Ministry of Finance
UN-ESCAP Lecture-2 External Debt by Tarun Das 1
Contents
1. India’s position in the world
2. External debt situation
3. Trends for debt sustainability
ratios since 1990
4. Legal system and governance
5. Policies and capacity building
6. Lessons from Indian experience
1
India’s position
in the world

1.1 International Comparison of
top 10 debtor countries in 2003
Country and Rank in Total external Share of Debt to GNP
terms of stock of debt concessional ratio
external debt (US$ billion) debt (per cent) (per cent)
1. Brazil 235 1 30
2. China 194 17 15
3. Russian Federation 176 1 50
4. Argentina 166 1 104
5. Turkey 146 4 77
6. Mexico 140 1 23
7. Indonesia 134 27 80
8. India 114 38 22
9. Poland 95 7 40
10.Philippines 63 23 77
Country and Rank in Ratio of short term Debt service
terms of stock of debt to (per cent) ratio
external debt Total debt Foreign exch. (per cent)
1. Brazil 8.3 39.8 63.8
2. China 32.7 17.5 7.3
3. Russian Federation 17.6 39.3 11.8
4. Argentina 13.8 162.4 37.9
5. Turkey 15.8 64.7 38.5
6. Mexico 6.6 15.5 20.9
7. Indonesia 17.0 63.2 26.0
8. India 4.2 4.6 18.1
9. Poland 20.5 57.4 25.1
10.Philippines 9.9 39.0 22.1
1.3 Indebtedness and Income
Group Classification
Severely Indebted: Low Income:
Either PV/XGS > 220% PC-GNP less than $765
Or PV/GNP > 80%
Middle Income : PC-GNP
between $766 and $9385
Moderately Indebted: Low Income:
Either 132% <PV/XGS< 220% PC-GNP less than $765
or 48% <PV/GNP< 80%
Less Indebted: Low Income:
Both PV/XGS< 132% PC-GNP less than $765
and PV/GNP< 48%
Country and PV of PV/ GNP PV to Indebtedness
Rank in EDT ratio exports and income
terms of EDT $ Bln (%) (%) Classification
1. Brazil 254.1 54 323 Severe/ Middle
2. China 188.5 15 48 Less/ Middle
3. Russian Federation 186.5 117 531 Severe/ Middle
4. Argentina 184.2 52 135 Moderate/ Middle
5. Turkey 157.1 25 83 Less / Middle
6. Mexico 153.0 81 243 Severe/ Middle
7. Indonesia 136.9 82 200 Severe/ Middle
8. India 100.3 19 106 Less/ Low
9. Poland 93.5 48 147 Moderate/ Middle
10.Philippines 65.4 80 147 Moderate/ Middle
South Asian countries in 2003
Country PV PV to PV to Indebtedness
and Rank in of Debt GNP XGS and income
terms of EDT $ Bln ratio ratio Classification
1. India 100.3 19 106 Less/ Low
2. Pakistan 29.7 41 189 Moderate/ Low
3. Bangladesh 12.8 25 128 Less/ Low
4. Srl Lanka 8.4 51 110 Moderate/ Middle
5. Nepal 2.1 38 131 Less / Low
6. Bhutan 0.4 74 252 Severe/ Low
7. Maldives 0.2 35 41 Severe/ Middle

2
External Debt Situation
of India

2.1 External Debt of India
Year Total Official Official Conce-
End (US$ Bln) Creditors Debtors ssional
(percent) (percent) (percent)
1990-91 83.8 64 60 46
1995-96 93.7 64 57 45
2000-01 101.3 51 43 35
2001-02 98.4 52 44 36
2002-03 105.0 48 42 37
2003-04 111.7 45 40 36
2004-05 123.3 43 39 34

2.2 Creditor Composition of
External Debt (in per cent)
Creditors March 1991 March 2005
Multilateral 28 26
Bilateral 32 14
Non-resident 17 26
Indians
Others 23 34
Total 100 100

2.3 Debtor composition of
External debt (in per cent)
Debtors March 1998 March 2005
Government 50 39
Non-government 50 61
-- Financial Sec 22 34
-- Public sector 10 17
-- Private sector 13 4
-- Short-term 5 6
Total
UN-ESCAP Lecture-2 100
External Debt by Tarun Das 100 12
2.4 Currency Composition
of External Debt
Currency March 1996 March 2005
US dollar 41 45
SDR 15 16
Indian Rupees 15 19
Japanese Yen 14 11
Euro 9* 5
Pound sterling 3 3
Others 3 1
Total 100 100
* DM, French Franc, Netherlands Guild
2.5 Contingent External
Liability of the Central Govt
Year As per cent As per cent to
to GDP total external debt
1994 4.3 13.1
1995 3.7 12.5
2000 1.3 7.3
2002 1.5 7.1
2003 1.3 6.2
2004 1.0 5.8
2005 1.0 5.5
3
Trends of Debt
Sustainability Indicators

3.1 Significant reduction in External
Debt Service Ratio (at end March)
(% of gross current receipts)
40
35.3
35
30.2
30 27.5
25.4 25.9 26.2
25 23.0
19.5 18.8
20 17.1 16.2 16 16.2
13.7
15
10 6.1
5
0

Debt to GDP ratio (at the end March)
45
38.7 37.5
40
33.8
35 30.8
28.7
30 27.0
24.6 24.3 23.6
25 22.1 22.6 21.1
20.2
20 17.8 17.4
15
10
5
0

Debt to current receipts ratio (March)
350 329 323
312
300 276
250 236
189
200 170 160 162
146
150 128 122
110
99 95
100
50
0

3.4 Reduction in Concessional to Total
External Debt Ratio (end March)
50 45.9 44.8 44.5 44.4 45.3 45
45 42.3
39.5 38.5 38.9
40 35.5 36.0 36.8 36.1
33.5
35
30
25
20
15
10
5
0

3.5 Reduction in Short Term Debt to
Total External Debt Ratio (end March)
12
10.2
10
8.3
8 7.0 7.2
6.1
6 5.4 5.4
4.3 4.4 4.4
3.9 4.0 4
3.6
4 2.8

3.6 Reduction in Short Term Debt to
Total Foreign Exch. Ratio (end March)
450
400 382
350
300
250
200
150 126
98
100
50 24 21 30 30 19 15 11 9 5.4 6.5 4.1 6.1
0

3.7 Substantial increase in
Foreign Investment Inflows (US$ billion)
14
12.5
12
11
10
8
in US $ billion
6.7
6 6.0
5.4
5.9
5.1 4.9 5.1
4.2 4.6
4
2 2.3
0.6
0 0.1 0.1

4
Legal System
and Governance
of Public Debt in India

4.1. Fiscal Federalism
& Public Debt
• India has a fiscal federalism with distinct
powers of Union and state governments.
• As per Indian budgetary practice, Public
Debt comprises of :
– Internal Debt
– External Debt
– Other Liabilities.
• Other Liabilities include provident funds,
post office and small savings deposits,
reserve funds etc.

4.2. Fiscal Federalism
& Public Debt
– State Government’s power to borrow is
limited to Internal Debt.
– Indian Constitution provides power to
Central and State Governments to place
limits on internal and external debt.

4.3 Laws and Acts for Public Debt
• Management of Public Debt and External Debt in
India are governed by various Acts.
• Under the provisions of the Reserve Bank of India
(RBI) Act of 1935, RBI acts as the debt manager
for the domestic debt of both the Union
government and state governments.
• The procedures and rules for internal debt
management are indicated in the Public Debt Act
of 1944, amended from time to time.
• Limits on Public debt are specified under the
Fiscal Responsibility and Budget Management
(FRBM) Act of 2003 and FRBM Rules of 2003.
4.4 Institutional Arrangement in
Management of Domestic Debt
• Reserve Bank of India acts as the
principal debt manager for domestic
debt of the Central Govt with active
advice from the Ministry of Finance.
• Institutional Arrangement :
– Front Office : RBI
– Middle Office : Budget Division, MoF
– Back Office : Comptroller & Auditor
General.
4.5 Institutional arrangement for
management of external debt
• Ministry of Finance plays the key role in
close association with the RBI.
- Head Office: Finance Minister
– Front Office : Fund-Bank, ECB, ADB,
EEC, FI/FT, Japan Divisions of MOF;
and RBI
– Middle Office : External Debt
Management Unit (EDMU) in MoF:
– Back Office : Office of the Controller
of Aid Accounts and Audit (CAA&A).
4.6 Accountability and Audit
 All expenditures and receipts are

subject to audit and accounting
principles, under Controller General
of Accounts
 Controller of Aid Accounts and
Audit Office for external debt.

4.7 Fiscal Responsibility and Budget
Management (FRBM) Act 2003
• FRBM Act 2003 and FRBM Rules 2004 came into
force w.e.f. 5 July 2004.
• The Act mandates the Central govt to eliminate
revenue deficit by March 2009 and to reduce
fiscal deficit to 3% of GDP by March 2008.
• Under section 7 of the Act, the central govt is
required to lay before both houses of
Parliament Medium Term Fiscal Policy
Statement, Fiscal Policy Strategy Statement and
Macro Economic Framework Statement along
with the Annual Financial Statement and
Demand for Grants.

4.8 FRBM Rules 2004
• Reduction of revenue deficit by 0.5%

of GDP or more every year.
• Reduction of gross fiscal deficit by
0.3% of GDP or more every year.
• No assumption of additional debt
exceeding 9% of GDP for 2004-05 and
progressive reduction of this limit by
at least one percentage point of GDP
in each subsequent year.
4.9 FRBM Rules 2004
• No guarantee in excess of 0.5% of
GDP in any financial year.
• Four fiscal indicators to be projected
for the medium term. These include
revenue deficit, fiscal deficit, tax
revenue and total debt as % of GDP.
• Greater transparency in the budgetary
process, rules, accounting standards
and policies having bearing on fiscal
indicators.
• Quarterly review of the fiscal situation.
4.10 FRBM Rules 2004
• The rules mandate the Central
Government to take appropriate
collective action in the case of revenue
and fiscal deficits exceeding 45% of
the budget estimates, or total non-
debt receipts falling short of 40% of
the budget estimates at the end of
half year of the financial year.
• The rules also prescribe the formats
for the mandatory statements.
4.10 Medium Term Fiscal Indicators
Items 2004- 2005- 2006- 2007-
05 RE 06 BE 07 Tar 08 Tar
1.Revenue Deficit 2.7 2.7 2.0 1.1
as % of GDP
2.Fiscal Deficit 4.5 4.3 3.8 3.1
as % of GDP
3.Gross tax rev. 9.8 10.6 11.1 12.6
as % of GDP
4.Year-end debt 68.8 68.6 68.2 67.3
stock (% of GDP)
4
Policies for External Debt
Management

4.1 Management of External Debt
• Cautious and step by step and gradual
approach towards capital account
convertibility.
• Liberalization of non-debt creating
financial flows (such as FDI and
portfolio equity) followed by
liberalization of long-term and medium
term debt inflows.
• Partial liberalization of external
commercial borrowing.
4.2 Management of External Debt
• Tight control on short term external
debt and close watch on the size of the
current account deficit.
• Subnational entities (such as States,
local governments) are not allowed to
borrow directly from Fund-Bank, ADB.
• Capital account restrictions for residents
and modest short-term liabilities helped
India to insulate from the East Asian
economic crisis during 1997-2000.
4.3 Management of Sovereign
External Debt
• High share of concessional debt (80 %
at the end of March 2005).
• No government borrowing from
external commercial sources.
• No short-term external debt by
government.
• Maturity of government debt
concentrated towards long-end for the
debt portfolio.

4.4 Management of Sovereign
External Debt
• No tied loans since 2003.
• No external assistance from bilateral
countries except from Japan, USA, EC and
Russian Federation since 2003.
• Prepayment of more expensive debt.
• India prepaid $5.9 billion debt to World bank
and ADB in 2002-2004.
• Bilateral loans amounting to $1.3 billion from
Sweden, Netherlands, Austria, Australia,
Canada, Spain, Denmark, Kuwait and Saudi
Arabia were completely liquidated in 2002-04
4.5 India’s Views on World Bank
Debt Relief Program of HIPCs
• India fully supports the HIPC program.
• India is the first developing country to
join the program.
• However, India’s view is that extra
resources should be generated for the
the program and it should not be at the
cost of resource flows to other
developing countries.
4.6 India’s Views on World Bank Debt
Relief Program of HIPCs
• Debt write-off programs should be
supplemented by credible structural
reforms and macro stabilization policies
for:
> Sustainable high growth
> Reduction of fiscal deficit
> Employment generation programs
> Poverty alleviation programs
5
Monitoring,
Dissemination and
Capacity Building

5.1 Monitoring of External Debt
• 100% government debt data and 78% of total
external debt data are computerized on the
basis of Commonwealth Secretariat DRMS.
• Projects underway to computerise fully NRI
deposits and short term debt which account
for the residual 22% of total external debt.
• Historical trends and future projections of
debt stock and debt services are available for
analysis, scenario building and as MIS inputs.
• Debt Data updated quarterly for March, June,
September, December. June 2005 debt data
are now under compilation .
5.2 Debt Data Dissemination
• Data by both Creditors and Debtors
classification are available.
• Data by Currency, maturity and interest mix
are also available.
• Data cross-classified by institutions and
instruments are also available.
• Time lag for data update : 8 weeks - well
below the SDDS benchmark of the IMF.
• Status Report on External Debt is presented to
the Parliament every year. Also posted on the
MOF homepage
(www.nic.in/finmin/miscellaneous).
5.3 Capacity Building for External
Debt Management
• World Bank provided an IDF Grant for strengthening
external debt management of India.
• Achievement under IDF Grant :
– Computerization and common database platform
on the basis of CS:DRMS.
– Debt-Data connectivity established between RBI,
Office of CCAA&A and the EDMU in the MOF.
– Organized 3 international seminars & one
workshop with active participation by the World
Bank, RBI, Financial Institutes, Commercial banks,
corporate bodies, investment banks.
– Published
UN-ESCAP Lecture-2
three Books on papers & proceedings.45
External Debt by Tarun Das
5.4 World Bank IDF Grant
• Projects completed with partial help of IDF Grant:
– Report on Monitoring of Non-Resident Indian Deposits.
– Report on Monitoring of Short-term External Debt.
– Report on Monitoring of non-debt financial flows.
– Report on Measurement of External Sector Related Contingent
liabilities.
– Building Models on Sovereign External Debt Management and
External Debt Sustainability.
– Report on Middle Office for Public Debt
– Establishment of the Centre of Excellence for training at the
CAB, RBI, Pune.

6
Lessons from Indian
Experience

6.1 Lessons from Indian Experience
 Management of external debt is closely related
to the management of domestic debt, which in
turn depends on the management of overall
fiscal deficit.
 Debt management strategy is an integral part of
the wider macro economic policies, which act
as the first line of defense against any external
financial shocks.
 For an emerging economy, it is better to adopt a
policy of cautious and gradual movement
towards capital account convertibility.
 At the initial stage, it is better to encourage non-
debt creating financial flows followed by
liberalization of long-term debt.
 It is necessary to adopt suitable policies for
enhancing exports and other current account
receipts which provide the means for financing
imports and debt services.
 Detailed data recording and dissemination are
pre-requisites for an effective management and
monitoring of external debt and formulation of
appropriate debt management policies.
Need for Setting up an integrated Public Debt
Office
- To deal with both domestic & external debt
- To set bench marks on interest rate, maturity
mix, currency mix, sources of debt
- Identification and measurement of contingent
liabilities
-- Policy formulation for debt management
-- Monitoring risk exposures
- Building Models in ALM framework

 It is vital that external forward liabilities and
short-term debt are kept within prudential limits.
 It is important to strengthen public and
corporate governance and enhance
transparency and accountability.
 It is also necessary to strengthen the legal,
regulatory and institutional set up for
management of both internal and external debt.
 A sound financial system with well developed
debt and capital market is an integral part of a
country’s debt management strategy.
Thank you
Have a Good Day

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Management of

External Debt in India

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 All expenditures and receipts are

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• Reduction of revenue deficit by 0.5%

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