External Debt Management in India by Tarun Das

8/6/2019 External Debt Management in India by Tarun Das

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UN-ESCAP Lecture-2 External Debt by Tarun Das 1

Management ofExternal Debt in India

Presented by

Dr Tarun DasEconomic AdviserMinistry of Finance




Contents

1. India s position in the world

2. External debt situation3. Trends for debt sustainabilityratios since 1990

4. Legal system and governance5. Policies and capacity building6. Lessons from Indian experience




1

India s positionin the world




1.1 International C omparison oftop 10 debtor countries in 2003

Country and Rank in Total external Share of Debt to GNPterms of stock of debt concessional ratio

external debt (US$ billion) debt (per cent) (per cent)1. Brazil 235 1 30

2. China 194 17 153. Russian Federation 176 1 504. Argentina 166 1 1045. Turkey 146 4 776. Mexico 140 1 237. Indonesia 134 27 808. India 114 38 229. Poland 95 7 4010.Philippines 63 23 77




1.2 I nternational C omparison oftop 10 debtor countries in 2003

Country and Rank in Ratio of short term Debt serviceterms 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 7.33. Russian Federation 17.6 39.3 11.84. Argentina 13.8 162.4 37.95. Turkey 15.8 64.7 38.56. Mexico 6.6 15.5 20.97. Indonesia 17.0 63.2 26.08. India 4.2 4.6 18.19. Poland 20.5 57.4 25.110.Philippines 9.9 39.0 22.1




1.3 Indebtedness and IncomeGroup Classification

Severely Indebted:Either PV/XGS > 220%Or PV/GNP > 80%

Low Income:PC-GNP less than $765

Middle Income : PC-GNPbetween $766 and $9385

Moderately Indebted:Either 132% <PV/XGS< 220%or 48% <PV/GNP< 80%



Less Indebted:Both PV/XGS< 132%and PV/GNP< 48%






1.4 International C omparison oftop 10 debtor countries in 2003

Country and PV of PV/ GNP PV to IndRank in EDT ratio exports and incterms of EDT $ Bln (%) (%) Classi

1. Brazil 254.1 54 323 Severe/ M

2. China 188.5 15 48 Less/ Mid3. Russian Federation 186.5 117 531 Seve4. Argentina 184.2 52 135 Moderat5. Turkey 157.1 25 83 Less / M6. Mexico 153.0 81 243 Severe/7. Indonesia 136.9 82 200 Severe/8. India 100.3 19 106 Less/ Lo9. Poland 93.5 48 147 Moderate/10.Philippines 65.4 80 147 Moderat




2External Debt Situation

of India




2.1 External Debt of IndiaExternal Debt of India Year Total Official Official Conce-End (US$ Bln) Creditors Debtors ssional

(percent (percent (percent)

1990-91 83.8 64 60 461995-96 93.7 64 57 452000-01 101.3 51 43 352001-02 98.4 52 44 36

2002-03 105.0 48 42 372003-04 111.7 45 40 362004-05 123.3 43 39 34




2.2 C reditor C omposition ofExternal Debt (in per cent)

C reditors March 1991 March 2005

Multilateral 2 26

ilateral 32 14

on-resident

Indians

1 26

Others 23 34

Total 100 100




2.3 Debtor composition ofExternal debt (in per cent)

Debtors March 1998 March 2005

Go vernment 50 39

Non-go vernment

50 61

-- Financial Sec 22 34

-- Public sect or 10 17

-- Private sect or 13 4

--Short-term 5 6

Total 100 100




2.4 Currency Composition

of External Debt Currency March 1996 March 2005US dollar 41 45

SDR 15 16Indian Rupees 15 19Japanese Yen 14 11Euro 9* 5

Pound sterling 3 3Others 3 1Total 100 100

* DM,French Franc ,Netherlands Guild




2.5 Contingent ExternalLiability of the Central Govt Year As per cent As per cent to

to GDP total external debt1994 4.3 13.11995 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




3Trends of Debt

Sustainability Indicators




3.1 Significant reduction in ExternalDebt Service Ratio (at end March)

(% of gross current receipts)35.3

30.227.5

25.4 25.9 26.2

23.0

19.5 18.817.1 16.2

13.716 16.2

6.1

05

10

15

20

25

30

35

40

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5




3.2 Significant reduction in ExternalDebt to GDP ratio (at the end March)

28.7

38.7 37.5

33.830.8

27.0

24.6 24.3 23.6 22.1 22.621.1 20.2

17.8 17.4

05

10

15

20

25

30

35

40

45

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5




3.3 Significant reduction in ExternalDebt to current receipts ratio (March)

329312

323

276

236

189170 160 162

146128 122

11099 95

050

100

150

200

250

300

350

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5




3.4 Reduction in Concessional to TotalExternal Debt Ratio (end March)

45.9 44.8 44.5 44.4 45.3 4542.3

39.5 38.5 38.935.5 36.0 36.8 36.1

33.5

05

1015202530

35404550

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5




10.2

8.3

7.0

3.94.3

5.4

7.2

5.4

4.44.0

3.62.8

4.44

6.1

02

0

2

2 2 0

0 0 2 0

0 2 0

0 2 2 0

0 2 0

0 2 0

0

3.5 Reduction in Short Term Debt toTotal External Debt Ratio (end March)




382

12698

24 21 30 30 19 15 11 9 5.4 6.5 4.1 6.1

1

1

2

2

1 1

1 2

1 1 1 1 1 1 1 2 2 1

2 2

2 2 2

3.6 Reduction in Short Term Debt toTotal Foreign Exch. Ratio (end March)




3.7 Substantial increase inForeign Investment Inflows (US$ billion)

0.1 0.10.6

4.25.1 4.9

6.05.4

2.3

5.15.9 6.7

4.6

11

12.5

0

2

6

8

0

1214

1 9 9 0 -

9 1

1 9 9 1 - 9 2

1 9 9 2 - 9 3

1 9 9 3 -

9 4

1 9 9 4 -

9 5

1 9 9 5 -

9 6

1 9 9 6 -

9 7

1 9 9 7 - 9 8

1 9 9 8 -

9 9

1 9 9 9 -

0 0

2 0 0 0

- 0 1

2 0 0 1

- 0 2

2 0 0 2

- 0 3

2 0 0 3 -

0 4

2 0 0 4

- 0 5

i n U S

$

b i l l i o n




4Legal System

and Governanceof Public Debt in India




4.1.4.1. Fiscal FederalismFiscal Federalism

& Public& Public Debt Debt India has a fiscal federalism withdistinct powers of Union and stategovernments.

As per Indian budgetary practice,Public Debt comprises of : Internal Debt External Debt

Other Liabilities.Other Liabilities include providentfunds, post office and small savingsdeposits, reserve funds etc.




4.2. Fiscal Federalism4.2. Fiscal Federalism& Public& Public Debt 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 f or Public Debt

Management of Public Debt and ExternalDebt in India are governed by various Acts.Under the provisions of the Reserve Bank ofIndia (RBI) Act of 1935, RBI acts as the debtmanager for the domestic debt of both theUnion government and state governments.The procedures and rules for internal debtmanagement are indicated in the Public DebtAct of 1944, amended from time to time.

L imits on Public debt are specified under theFiscal Responsibility and BudgetManagement (FRBM) Act of 2003 and FRBMRules of 2003.




4.4 Institutional Arrangement in4.4 Institutional Arrangement inManagement of Domestic Debt Management of Domestic Debt

Reserve Bank of India acts as theprincipal debt manager for domesticdebt of the Central Govt with activeadvice from the Ministry of Finance.Institutional Arrangement : Front Office : RBI

Middle Office : Budget Division, MoF Back Office : Comptroller & Auditor

General.




4.5 Institutional arrangement formanagement of external debt

Ministry of Finance plays the ey role inclose association with the I.- Head Office: Finance Minister Front Office : Fund- an , E CB , AD B ,

EEC , FI FT, Japan Divisions of MOF;and B I

Middle Office : External DebtManagement Unit (EDMU) in MoF:

B ac Office : Office of the C ontrollerof Aid Accounts and Audit ( C AA&A).




4.6 Accountability and Audit

All expenditures and receipts aresubject to audit and accountingprinciples, under Controller General

of AccountsController of Aid Accounts and

Audit Office for external debt .




4. Fiscal esponsibility and B udgetManagement (F B M) Act 2003

FRBM Act 2003 and FRBM Rules 2004 cameinto force w.e.f. 5 July 2004.The Act mandates the Central govt toeliminate revenue deficit by March 2009 andto reduce fiscal deficit to 3% of GDP byMarch 2008.Under section 7 of the Act, the central govt is required to lay before both houses of

Parliament Medium Term Fiscal PolicyStatement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement along with the Annual Financial Statement and Demand for Grants.




4. F B M ules 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 byat least one percentage point of GDPin each subsequent year.




4.9 F B M ules 2004No guarantee in excess of 0.5% of GDP in any financial year.Four fiscal indicators to be projectedfor the medium term. These include

revenue deficit, fiscal deficit, taxrevenue and total debt as % of GDP.Greater transparency in the budgetaryprocess, rules, accounting standards

and policies having bearing on fiscalindicators.Quarterly review of the fiscal situation.




4.10 F B M ules 2004The rules mandate the CentralGovernment to take appropriatecollective action in the case of revenueand 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 formatsfor the mandatory statements.




4.10 Medium Term Fiscal Indicat ors

Items 2004-05 RE

2005-06 BE

2006-07 Tar

2007-08 Tar

1.Revenue Deficit

as % of GDP

2.7 2.7 2.0 1.1

2.Fiscal Deficitas % of GDP

4.5 4.3 3.8 3.1

3.Gross tax rev.as % of GDP

9.8 10.6 11.1 12.6

4.Year-end debtst ock (% of GDP)

68.8 68.6 68.2 67.3




4

Policies for External Debt Management




4.1 Management of External Debt Cautious and step by step and gradualapproach towards capital account convertibility.Liberalization of non-debt creatingfinancial flows (such as FDI andportfolio equity) followed byliberalization of long-term and medium

term debt inflows.Partial liberalization of externalcommercial borrowing.




4.2 Management of External Debt Tight control on short term externaldebt and close watch on the size of thecurrent account deficit.Subnational entities (such as States,local governments) are not allowed toborrow directly from Fund-Bank, ADB.Capital account restrictions for residents

and modest short-term liabilities helpedIndia to insulate from the East Asianeconomic crisis during 1997-2000.




4.3 Management of SovereignExternal 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 bygovernment.Maturity of government debt concentrated towards long-end for thedebt portfolio.




4.4 Management of SovereignExternal Debt

No tied loans since 2003.No external assistance from bilateralcountries except from Japan, USA, EC andRussian Federation since 2003.Prepayment of more expensive debt.India prepaid $5.9 billion debt to World bankand ADB in 2002-2004.Bilateral loans amounting to $1.3 billion fromSweden, 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 Pr ogram of HIPCsIndia fully supports the HIPC program.India is the first developing country to

join the program.However, India ¶ s view is that extraresources should be generated for thethe program and it should not be at thecost of resource flows to otherdeveloping countries.




4.6 India ¶ s Views on World Bank

Debt Relief Pr ogram of HIPCsDebt write-off programs should besupplemented by credible structural

reforms and macro stabilization policiesfor:>Sustainable high growth

>Reduction of fiscal deficit >Employment generation programs>Poverty alleviation programs




5

Monitoring,Dissemination and

C apacity B uilding




5.1 Monitoring of External Debt

100% government debt data and 78% of total external debt data are computerized onthe basis of Commonwealth Secretariat DRMS.Projects underway to computerise fully NRIdeposits 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 foranalysis, scenario building and as MIS inputs.Debt Data updated quarterly for March, June,September, December. June 2005 debt dataare now under compilation .




5.2 Debt Data DisseminationData by both Creditors and Debtorsclassification are available.Data by Currency, maturity and interest mixare also available.

Data cross-classified by institutions andinstruments are also available.Time lag for data update : 8 weeks - wellbelow the SDDS benchmark of the IMF.

Status Report on External Debt is presentedto the Parliament every year. Also posted onthe MOF homepage(www.nic.in/finmin/miscellaneous).




5.3 Capacity Building for ExternalDebt Management

World Bank provided an IDF Grant for strengtheningexternal 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 WorldBank, RBI, Financial Institutes, Commercialbanks, corporate bodies, investment banks.

Published three Books on papers & proceedings.




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

trainin at the CAB RBI Pune.




6

Lessons from IndianExperience




6.1 Lessons from Indian Experiencey

Management of external debt is closely relatedto the management of domestic debt, which inturn depends on the management of overallfiscal deficit.

y Debt management strategy is an integral part of the wider macro economic policies, which actas the first line of defense against any externalfinancial shocks.

y For an emerging economy, it is better to adopt apolicy of cautious and gradual movementtowards capital account convertibility.




6.2 Lessons from Indian Experiencey A t the initial stage, it is better to encourage

non-debt creating financial flows followed byliberalization of long-term debt.

y It is necessary to adopt suitable policies for enhancing exports and other current accountreceipts which provide the means for financingimports and debt services.

y

Detailed data recording and dissemination arepre-requisites for an effective management andmonitoring of external debt and formulation of appropriate debt management policies.




6.3 Lessons from Indian ExperienceNeed for Setting up an integrated Public Debt

Office- To deal with both domestic & external debt

- To set bench marks on interest rate, maturitymix, currency mix, sources of debt - Identification and measurement of contingent

liabilities

-- Policy formulation for debt management -- Monitoring risk exposures- Building Models in ALM framework




6.4 Lessons from Indian Experience

y It is vital that external forward liabilities andshort-term debt are kept within prudential limits.

y It is important to strengthen public andcorporate governance and enhancetransparency and accountability.

y It is also necessary to strengthen the legal,regulatory and institutional set up for management of both internal and external debt.

y A sound financial system with well developeddebt and capital market is an integral part of acountry ¶ s debt management strategy.




Thank you

Have a Good Day

External Debt Management in India by Tarun Das

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