External Debt Development and Management: Some Reflections on India

Dr HK Pradhan Professor of Finance and Economics !RI "amshedp#r India

Regional $or%shop on &apacit'(b#ilding for External Debt Management in the Era of Rapid )lobali*ation +(, "#l' -../ 0ang%o%

Introd#ction
In 1990-91 when India got into a severe foreign exchange crisis her outstanding level of external debt was $ 83. 8 billion. The level of debt was about 40 er cent of !ross "o#estic $roduct and the debt service a%#ent was about 30 er cent of ex orts of goods and services. &everal destabili'ing forces acting on the Indian foreign exchange #ar(ets were a downgrade of India)s sovereign credit ratings to non-invest#ent grade* reversal of ca ital flows* exacerbated the foreign exchange crisis and withdrawal of the foreign currenc% de osits held b% non-resident Indians. +ne can best describe the severit% of the situation b% ,uoting fro# the then -inance .inister of India "r .an#ohan &ingh)s /udget 1990-93 s eech to the $arlia#ent1 "When the new Government assumed office (June 1991) we inherited an economy on the verge of collapse. Inflation was accelerating rapidly. he !alance of payments was in serious trou!le. he foreign e"change reserves were !arely enough for two wee#s of imports. $oreign commercial !an#s had stopped lending to India. %on&resident Indians were withdrawing their deposits. 'hortages of foreign e"change had forced a massive import s(uee)e* which had halted the rapid industrial growth of earlier years and had produced negative growth rates from +ay 1991 onwards". 2ith this bac(ground a stud% on India)s external debt would obviousl% raise certain ,uestions such as1 how did India #anage historicall% with a ver% low volu#e of external ca ital inflows3 how is that the third world debt crisis of earl% 80s had a little i# act3 how is it then that India got into a #assive foreign exchange crisis in 1990-913 how was India s ared fro# the contagious currenc% crisis of 19943 and how did India #anaged to i# rove her ran( fro# what was third debtor after /ra'il and .exico in 1991 to eighth in 0000 in the list of the to fifteen debtor countries5as er the !lobal "evelo #ent -inance re ort 0004 ublished b% the 2orld /an(6. &till #ore notable is the fact that India never defaulted to international lenders in her entire credit histor% 5exce t one or two instances of cor orate rescheduling6. 7lthough the level of debt has increased to $ 110.1 billion b% end-"ece#ber 0003* the #agnitude of debt is no longer an issue at resent. The econo#ic refor#s and debt #anage#ent olicies ursued since 1991 have hel ed to bring down the share of external debt in !"$ to 00.0 er cent and the debt service ratio to 18.8 ercent b% end-"ece#ber 0003. The refor#s involving trade and ca ital account liberalisatrion have changed the nature and co# osition of ca ital flows into Indian econo#%. The gradual o ening of the ca ital account and i# roved credit standing internationall%* su orted b% the rudent #acroecono#ic olicies* have established investors) confidence. The above scenario although resu oses several acco# lish#ents underl%ing the countr%)s external debt #anage#ent histor%* the Indian econo#% nevertheless dis la%ed several e isodes of i#balances in her debt* ca ital flows and external sector. This a er uts in ers ectives the case of India)s external debt #anage#ent in the light of the develo #ent in her overall #acroecono#ic olicies and draws lessons for countries in

the region. It needs to be #entioned here that the trends in debt need to be reviewed along with the develo #ents in external sector and ca ital flows* because the overall trade regi#e* involving trade restrictions* ex ort subsidisation and exchange controls would govern to a large extent the behaviour of external debt.

External Debt Development 1ntil 23,.s

9oo(ing at historicall% one observes that external ca ital la%ed a ver% insignificant role in India)s develo #ent rocess. The industrialisation strateg% ado ted since the 1980s e#ulated an i# ort substituting trade regi#e* with both i# orts and ex orts being strictl% regulated through ,uota and duties. The level of current account deficit was as low as 1.0 er cent in 1940* #atching the availabilit% of external finance* #ost of which were contracted fro# the official creditors and at concessional interest rates. $rivate co##ercial borrowings fro# the international ca ital #ar(ets were nil. The total external debt outstanding at $ 8.4 billion was :ust about 13.3 er cent of !"$ for the %ear 1940. India res onded ver% well to the first oil shoc( of 1943* with rudent #acroecono#ic #anage#ent. The deflationar% stance of #acroecono#ic olicies cou led with #assive inflows of inward re#ittances fro# !ulf led to even a sur lus on current account in 194;-44* which hel ed to build u the reserve level. I# orts were virtuall% restricted to the level of ex orts* and thus the entire inflows of wor(er<s re#ittances and net aid inflows 5after ad:usting the gross flows for debt service6 were loughed bac( to build u the reserves. It was no sur rise* therefore* to find that during this eriod gross aid inflows were shar l% reduced b% the donors* as these were onl% going to swell further the reserves. /% 194849* the reserve level reached about 9 #onths of i# ort re,uire#ents. There was strong o inion in so#e ,uarters as to whether India could ta(e advantage of this co#fortable foreign exchange situation to relax the severit% of the i# ort control regi#e. To so#e extent i# orts were liberalised in 194;-44 and 1944-48 through the introduction of + en !eneral 9icense 5+!96* but the ersistence of al#ost total rotection of the Indian industrial sector revented an% significant loosening of i# ort. The second oil shoc( had a #a:or i# act on India)s balance of a%#ents* however* with the rices of $+9 #ore than doubling during the course of 1949. The oil i# orts accounted for al#ost 88 ercent of total i# orts and 4; ercent in ter#s of ex ort earnings. The ri#ar% focus of balance of a%#ent #anage#ent after the second shoc( was to finance the deficit* rather to control the it through deflationar% stance of the first oil shoc(-t% e.

Developments in External Sector D#ring 234.s

India re#ained unaffected b% the debt crisis of earl% eighties facing #an% develo ing countries* due to her insignificant level of rivate debt. The foreign exchange constraints in the after#ath of second oil shoc( could be relieved b% drawing substantial a#ount of loans fro# the International .onetar% -und1 &"= 0;; #illion under >o# ensator%

-inancing -acilit% 5>--6 in 1980* &"= 809.01 #illion under Trust -und 9oan 5T-96 in 1980-81 and &"= 8 billion under ?xtended -und -acilit% 5?--6 during 1981-84 5of which India used onl% &"= 3.9 billion6. The foreign exchange situation also i# roved dra#aticall% due to the inflow of re#ittances fro# the !ulf. 7 substantial a#ount of i# ort savings could be #ade due to large-scale i# ort substitution in the areas of food* etroleu# 5after the discover% of /o#ba% @igh6 and fertili'er. Thus* an i# roved foreign exchange scenario* which along with the available #ultilateral concessional assistance hel ed India to retain her credit-worthiness and avoid a ossible li,uidit% crisis of the 9atin 7#erican t% e in earl% 1980s. In fact ta(ing the advantage of the i# roved foreign exchange scenario Indian olic% #a(ers atte# ted to relax the severit% of the controlled trade regi#e in the 80s. The liberali'ation of the i# ort control regi#e* articularl% the categor% of + en !eneral 9icense 5+!96 and ex ort-related licenses* o ened u a variet% of i# orts that were re,uired b% a wider range of e#erging consu#er goods industries. ?x ort growth re#ained sluggish during the eighties* due to the slowdown in the growth of world trade* decline in ri#ar% co##odit% rices in the global #ar(et* and the ex ansionar% olic% at ho#e* as the later #ight have reduced the ex ortable sur lus to so#e extent. Indeed the trade deficits went u fro# $ 8.9 billion in 1984-88 to $ 4.9 billion in 1990-91 5with $ 9.1 billion in 1988-896 and the current account deficits fro# $ 0.4 billion to $ 8.9 billion during the sa#e eriod 5based on =/I data6. 2ith the near stabilit% in the inflows of concessional assistance* financing of deficits were #ade b% raising co##ercial loans fro# the eurocurrenc% #ar(ets in the for# of s%ndicated loans and eurobonds as well as acce ting short ter# foreign currenc% de osits fro# the non-resident Indians. 5able 2: Indicators of &#rrent 6cco#nt S#stainabilit' for India7 $er cent6
Indicator Trade "eficitA !"$ >urrent 7ccount "eficitA!"$ !ross -iscal "eficitA!"$ $rivate &ector1 &I !a ?xternal "ebtA!"$ &hort-ter# "ebtATotal "ebt Con-"ebt >a ital -lowsATotal >a ital -lows "ebt &ervicing >hanges in =??= I# ort >over 5.onths6 1941- 194;- 1981- 198;- 1991- 199;- 00011948 1980 1988 1990 1998 0000 0003 -0.9 -1.4 -0.8 -0.1 -1.0 -0.8 -0.0 -0.4 0.0 -1.8 -0.0 -1.3 -1.3 0.0 -3.3 -8.0 -;.8 -8.1 -8.4 -8.1 -8.9 0.4 4.4 3.8 4.8 4.3 ;.; 9.9 18.3B 10.8B 13.0B 18.8B 33.9 04.3 01.0 .. .. .. 10.0 ;.4 8.3 3.; .. .. .. ;.0 04.1 49.3 94.8 .. .. 4.3 .. -0.1 4.4 .. 0.8 4.0 30.0 -4.9 3.3 08.9 -0.9 8.9 19.4 -0.8 4.0 18.3 4.8 11.0

B >o# rising of external assistance* co##ercial borrowings and I.- loans onl%. Thus* the external debt-!"$ ratio for these eriods is not co# arable with the subse,uent eriod. &I !a 1 &aving Invest#ent !a So#rce 1 =eserve /an( of India.

The i#balances in the external sector coincided with the #acroecono#ic i#balances in the econo#%* articularl% in the for# of increasing do#estic #one% su l% and budget deficits5see Table 16. The ex ansionar% #onetar% and fiscal olicies did not ta(e into account the li(el% re ercussion in the for# of s ill over effects on balance of a%#ents. In fact* the generation of the excess li,uidit% that acco# anied the liberalised i# ort structure swelled the level of current account deficit. The rinci al #ode of balance of a%#ent ad:ust#ents in India during the second half of the eighties was the #anaged de reciation of the ru ee. /etween 1988-90* the C??= of the ru ee de reciated b% al#ost 80 er cent and the =??= b% 30 er cent. It is clear that in a situation where the balance of a%#ent roble# was basicall% due to the #acroecono#ic i#balances* which arose ri#aril% fro# the ex ansionar% #acroecono#ic olicies and the liberalised i# ort structure* the ex enditure switching effects of devaluation did not wor(.

Developments to 2332 Foreign Exchange &risis

/% 1990* there was a #ar(ed deterioration in India<s balance of a%#ents. 7lthough there was satisfactor% growth in ex orts* it was overshadowed b% growth in i# orts* stagnant flows in invisibles such as touris# and rivate transfers* and #ounting debt service burden. The current account deficits which were sustained #ainl% b% borrowing fro# co##ercial sources and C=I de osits* with short #aturities and variable interest rates* resulted in a ballooning of re a%#ent burden towards 1990. The si'e of external debt reached $ 83 billion in .arch 1991* 48 er <cent of which was contracted fro# rivate creditors and at variable interest rates. The debt service a%#ents had reached 30 ercent of ex ort earnings b% .arch 1991* which was close to so#e of the heavil% indebted countries such as Indonesia D31 er cent6* .exico D08 er cent6* and Tur(e% 508 er cent6. Interest co# onents alone was about $ 4 billion* co# rising so#e 80 er cent of the total current account deficits and 01 er cent of the total #erchandise ex orts. The growth of ex orts in E& dollar ter#s was not sufficient even to a% for the interests for each of the three %ears to 1990-91 and India had to #a(e for a#orti'ation a%#ents b% resorting to fresh borrowing. The foreign exchange crisis was exacerbated b% the !ulf war that began in 7ugust 1990* causing shortfall in ex orts to 2est 7sia* loss of re#ittances fro# Fuwait and Ira,* huge foreign exchange costs of e#ergenc% re atriation fro# the region and* #ost i# ortantl%* additional cost of oil i# orts due to the oil rice increase. The !ulf crisis coincided with recessionar% trends in the 2est that had de ressed the de#and for India)s ex orts. -urther#ore* the econo#ic decline in ?astern ?uro e led to a contraction of ex orts to these #ar(ets. The uncertain olitical cli#ate at ho#e along with the recarious balance of a%#ents situation led to the erosion of India<s credit ratings abroad. The .ood%<s downgraded India<s status to // in 1990* which was the highest s eculative grade for long-ter# debt.

There were indications that the net resource transfer on account of official and rivate credit had beco#e negative in 1990-91 i.e. the fresh inflows were not even ade,uate to #eet the obligations on account of a#orti'ation and interest a%#ents. The level of foreign exchange reserves fell to :ust $ 1 billion in 1990-91. This des erate situation led the =eserve /an( of India to sell 00 tonnes of gold in .a% 1991 and ledge another 4;.91 tonnes in Gul% 1991* for #eeting the urgent foreign exchange needs and financing current account deficits. 7n i##inent foreign exchange crisis loo#ed large before the Indian econo#%* with unsustainable external debt burden.

&risis and Reform in the 233.s

The foreign exchange crisis o ened u several internal conflicts of an inward loo(ing econo#%. The olic% #a(ers considered the unsustainable balance of a%#ent situation as the s%# to# and the disease was inherent in the trade and industrial olic% that rotected the Indian econo#% fro# both internal and external co# etition. The shrin(ing share of India<s ex orts in the global trade was considered as the reflection of the receding ex orts co# etitiveness and the absence of a right (ind of co##odit% #ix in India<s ex ort bas(et. The inefficienc% of the trade regi#e had #uch to do with the rohibitive tariffs and a ervasive s%ste# of i# ort controls. The entire regi#e of discretionar% #anage#ent of foreign exchange had constrained growth* roliferated blac( #ar(ets in foreign exchange and created avenues for considerable rent-see(ing activities. India)s a roach to the 1990-91 crises was not to default on her external obligations* rather to ursue #acroecono#ic refor#s* and re#ain current on debt servicing b% borrowing fro# #ultilateral sources. 7s art of the overall #acroecono#ic refor#s* swee ing changes were introduced in the areas of trade and exchange rate olicies. The >ongress led govern#ent* which assu#ed office at the >entre in Gune 1991* acce ted the #ediu# ter# structural ad:ust#ent rogra##e of the I.-. 7n i##ediate fall out of this rogra##e was the shar devaluation of the ru ee. In Gul% 1991 the ru ee was devalued at two stages* fro# H 1 =s.34.3; to =s.41.89. This was followed b% a lethora of trade olic% refor# #easures* beginning 7ugust 1991* b% slashing cash subsidies for the ex ort sector and relieving the econo#% fro# the I= and tariff regi#es ado ted since fifties. India)s refor# efforts since 1990s had led to a resu# tion of growth* decline in inflation* i# roved fiscal deficit* and a sustainable balance of a%#ents. 7s we shall see later this had re#ar(abl% reduced the external debt burden and brought several beneficial changes in the co# osition of ca ital flows in %ears to co#e.

233, 6sian &risis and Its Impact

The &outheast 7sian crises had several co##on ele#ents1 s eculative attac( on the currencies 5with shar de reciation63 the authorities being forced to defend the lu##eting currenc% b% de leting large volu#es of international reserves3 ban(ing crisis

co# elling the govern#ents to extend #assive financial assistance to ban(s through budgetar% su ort to revent a colla se. 7nother distinguishing feature of the crisis was the effect of contagion3 crisis in one countr% s reading into several others in the region. The contagion i# act de ended on the degree of financial #ar(ets integration as well as the existing state of the econo#%. The s eculative attac(s were on those countries) currencies that were co# eting in the sa#e world #ar(ets for goods and ca ital. The 7sian crisis had onl% a #arginal i# act on India* with negligible i# act on her foreign exchange #ar(ets* the level of reserves and the ban(ing s%ste#. It has been observed that the #acro econo#ic funda#entals revailing at the ti#e cou led with the flexible exchange rate #anage#ent and control on short-ter# ca ital flows hel ed India to withstand the currenc% crisis. The crises de#onstrated that the #a:or ob:ective of sound debt #anage#ent olic% could be to achieve or #aintain debt sustainabilit%* while #eeting (e% econo#ic #acroecono#ic goals. 7t the ti#e of currenc% crisis India)s balance of a%#ents situation had beco#e sustainable due both to a reduction in the current account deficit and to a substantial increase in net ca ital inflows. The current account deficit had fallen fro# its ea( level of $ 9.8 billion in 1990- 91 to E& $3.4 billion in 1994-983 the later was esti#ated at 1.8J of the !"$. The 1994 level of current account deficit as er cent of !"$ was 4.9J in Thailand* 4.9J in Forea and .ala%sia* 3.3J in Indonesia and 4.4J in $hili ines. India)s external debt at the end of 1994-98 was $90.9 billion or 03.8 er cent of !"$. The debt-!"$ ratio was ver% high for the affected &outheast 7sian countries1 Thailand58;.8J6* Indonesia5;4J6* $hili ines584J6 and .ala%sia549J6. Table 01 &elected Indicators +f India)s ?xternal &ector5J growth unless noted6 Ite#AKear 91-90 90-93 93-94 94-98 98-9; 9;-94 94-98 1. !rowth of ?x orts -1.1 0. !rowth of I# orts -04.8 3. ?x ortsAI# orts 8;.4 4. =eserves to I# orts 8.3 8. &hort-ter# debtA=eserves 4;.4 ;. "ebt service =atio 30.0 4. >urrent account balanceB -0.4 8. ?xternal "ebtB 41.0 9. "ebt service a%#entsB 3.3 B 7s J of !"$ &ource1 ?cono#ic &urve% 3.3 18.4 44.; 4.9 ;4.8 04.8 -1.8 39.8 3.3 00.0 10.0 84.8 8.; 18.8 08.; -0.4 38.8 3.3 18.4 34.3 44.8 8.4 1;.9 0;.0 -1.1 30.3 3.; 00.3 01.; 44.0 ;.0 03.0 04.3 -1.8 08.0 3.; 4.8 10.1 40.0 ;.; 08.8 01.4 -1.0 08.9 3.3 0.; 8.8 83.3 4.0 19.8 18.3 -1.8 03.8 0.8

The level of international reserves* which was :ust $ 8.8 billion in 1991-90* increased to $09.4 billion 1994-98* roviding about 4 #onths of i# orts cover. Cevertheless* ex orts continued to finance over 80J of India) i# orts* thus #a(ing the trade account near selfsustaining. /% the end of .arch 1998* the co#bined level of ortfolio flows and short-

ter# debt constituted about 48 er cent of the countr%)s foreign exchange reserves. Indeed* the entire volatile inflows were said to have been added to reserves that had given sufficient leewa% for stabili'ing s eculations in the foreign exchange #ar(ets. The net ca ital inflows into India increased fro# $4.4 billion in 1991-90 to $9.8 billion in 199;-94* which ca#e down #arginall% to $8.0 billion in 1994-98* because of the uncertain do#estic and international environ#ent5#ainl% arising out of sanctions fro# the E&6. In the aggregate* there was alread% a shift towards non-debt creating flows* b% wa% of foreign institutional investors 5-II6 into India)s debt and e,uit% #ar(ets* euro e,uit% issues b% Indian co# anies* which had reached at $8.8 billion in 1994-98. "ebt flows 5to cover aid* co##ercial borrowings* C=I de osits* drawings fro# I.-6 in contrast was actuall% co#ing down significantl%* reaching about $3.0 billion in 1994-98. &hort-ter# debt was re eatedl% considered as an i# ortant ris( factor in the reci itation of foreign exchange crisis* es eciall% when cou led with high or unsustainable current account deficits. The share of short-ter# debt in the total debt was :ust ;J in India at the ti#e of crisis* which co# ares with 41J in Thailand* 08J in Indonesia* 08J in .ala%sia and 19J in $hili ines. /% the end of .arch 1998* the co#bined level of ortfolio flows and short-ter# debt constituted about 48 er cent of the countr%)s foreign exchange reserves. Indeed* the entire volatile inflows was said to have been added to reserves* that had given sufficient leewa% for stabili'ing s eculations in the foreign exchange #ar(ets. It needs to be recogni'ed that the short ter# flows also have rovided the necessaril% li,uidit% to an otherwise thin currenc% #ar(et in India. The 7sian crisis had therefore i# ortant olic% lessons* and articularl% in the context of external debt #anage#ent and ca ital flows. It is b% now abundantl% clear that the crisis was not :ust because of the high current account deficit but #uch to do with the wa% the current account deficit was financed* the nature of ca ital flows5such as debt vs non-debt creating flows6* and finall% the wa% external ca ital being used for5such as financing invest#ent as o osed to consu# tion or non tradable6. The relative i##unit% to the crisis had also #uch to do with the structure of ca ital flows. 7lthough the Indian ru ee was full% convertible on the current account* convertibilit% on the ca ital account front was rather as%##etric* with so#ewhat #ore restrictions on ca ital outflows than on inflows. 2ith controls on trade* foreign exchange transactions and short-ter# ca ital flows* it was therefore ossible to insulate the Indian econo#% fro# external shoc(s. ?xchange rate was considered the #ost i# ortant variable affecting the currenc% crisis. 7fter a devaluation of about 00J in Gul% 1991 India shifted to a s%ste# flexible exchange rate #anage#ent based on L artial convertibilit%M in .arch 1990 and finall% to L#ar(et deter#inedM exchange rate s%ste# in .arch 1993. The #ar(et driven exchange rate also had obliged the olic% #a(ers to have lower inflation* disci lined fiscal and #onetar% olicies* and stable real exchange rate for attaining sustainable balance of a%#ents. Ender the circu#stances the =eserve /an( retained the necessar% flexibilit% in #anaging the currenc%* b% ,uoting its own reference rate and activel% intervening at that rate fro# ti#e to ti#e. In addition the #ar(et driven exchange rate also revented excessive ris(-

ta(ing b% agents that would have occurred a fixed or a egged exchange rate regi#e. In fact* the existence of exchange ris(s have discouraged so#e of the #ore s eculative short-ter# ca ital flows in to India* thereb% reducing the need for olic% interventions.

110 100 90 80 70 60 50 40 30

Figure 4 : NEER & REER of the rupee

REER

NEER

The conduct of exchange rate olic% had also stabili'ing i# act on the currenc% and ca ital flows ursued with a ro riate #echanis#s of intervention and sterili'ation. 9oo(ing fro# the ex erience* one noticed so#e (ind of self-balancing #echanis#s to have wor(ed in the Indian foreign exchange #ar(ets. 7t a ti#e of exchange #ar(et ressure* the olic% see#ed to have been not to defend the currenc% full% b% s ending

19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03

reserves and* thereb%* offering the s eculators an eas% target. In addition the #ar(et driven exchange rate also revented excessive ris(-ta(ing b% agents that would have occurred a fixed or a egged exchange rate regi#e. In fact* the existence of exchange ris(s have discouraged so#e of the #ore s eculative short-ter# ca ital flows into India* thereb% reducing the need for olic% interventions.

Evolving Debt and &apital Flo8s Scenario 5o8ards -..9

India)s external $ 110.1 billion stood at the end of "ece#ber 0003* which increased fro# $ 83.8 billion in .arch 19915Table 36. The growth rate during the eriod was at an annual average rate of 0 er cent er annu#. &o#e of the increase has been due to valuation changes* resulting fro# the wea(ening of E& dollar vis,& vis other currencies 5for exa# le* $ 8.4 billion out of $;.8 billion increase in external debt during 0000-03 was due to such valuation changes6. In ter#s of the level of outstanding debt India ran(ed as eighth in 0000 fro# a#ong the to fifteen debtor countries in the world* co#ing after /ra'il* >hina* =ussian -ederation* .exico* 7rgentina* Indonesia and Tur(e%. This i# lied a #ar(ed i# rove#ent in her debtor osition since 1991 foreign exchange crisis* when her ran( was third fro# a#ong the to fifteen debtor countries* i.e. co#ing after the two #ost heavil% indebted countries such as /ra'il and .exico. 5able 9: India:s External Debt
71S ; mn<=End(March 2332 71S ; mn<=End(March 233+ 71S ; mn<=End(March -..2 DebtShare in total External Share in total External Debt Share in total External Debt 71S ; mn<=End(Dec -..9 Share in total External Debt 04 1; 0 4 18 04 0 8 2.. 9+</

.ultilateral /ilateral I.?x ort >redit >o##ercial /orrowing C=I "e ositsB =u ee "ebt &hort-ter# "ebt 5otal External debt Share of &oncessional Debt to 5otal Debt

00900 141;8 0;03 4301 10009 10009 10844 8844 494.2 //<4

08 14 3 8 10 10 18 10 2..

08;1; 19013 0344 834; 13843 11011 8033 8034 93430 /-<9

31 00 3 ; 18 10 9 8 2..

31898 18303 0 83;8 03004 14184 3040 0448 98484 9+<.

30 1; 0 8 04 14 3 3 2..

30888 14940 0 4443 00880 098;4 0;38 8443 110130

So#rce: India)s ?xternal "ebt 1 7 &tatus =e ort* !overn#ent of India* 0003.

7n i# ortant as ect of India)s external debt has been its concessionalit%. 7s of "ece#ber 0003 about 3;. 4 er cent of the overall debt ortfolio was characteri'ed b% concessional debt* contracted #ainl% fro# #ultilateral and bilateral institutions. "ue to the concessional nature of indebtedness the resent value conce t beco#es the a ro riate #easure* obtained b% discounting the future debt service a%#ents for individual loans b% a ro riate discount rates and aggregating such resent values. The resent values India)s external debt stood at $ 80.9 billion in the %ear 0000 which is 80 er cent of the total outstanding debt. 7ccording to !lobal develo #ent -inance* the resent value of external debt in the %ear 0000 was 14 er cent of !C$* lowest within the to fifteen debtor countries exce t >hina 5with 14 er cent in 00006.

45 40 35 30 $er'ent 25 20 15 10 5 0 1991 1992 1993

28&7 38&7 37&5

External e!t " # $ Ratio%

33&8 30&8 27 24&5 24&3 23&6 22&1 22&6 21&1

20&2

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

The effectiveness of debt #anage#ent olic% should be :udged in ter#s of the debt serving ca acit%* which can be gauged b% indicators #easuring solvenc% as well as li,uidit%. In Table 4 we anal%'e the #ost co##onl% used indicators debt sustainabilit%1 debt service ratio* interest service ratio* debt to gross do#estic roduct ratio* short-ter# debt to total debt and short ter# debt to foreign exchange reserves. 7s seen fro# Table there is re#ar(able i# rove#ent in all the ratios during 1990-0003. The stoc( of external debt to !"$ ratio declined fro# its ea( of 38.4 er cent in 1991-91 to 00 ercent in 0000-03. The debt service ratio which reached a record level of over 38 er cent in 199091* declined steadil% to 14.4 er cent in 0000-03. The #ost notable outco#e of external debt #anage#ent during 1990s has been the control over short-ter# debt. The level of short-ter# debt a#ounted to onl% E& $8.0 billion b% "ece#ber 0003. The share of short ter# debt to total debt declined

significantl% fro# over 10 er cent in 1990-91 to 4.4 er cent in 0000-03* which actuall% was the lowest for India fro# a#ong the to 18 debtor countries. The volu#e of short-ter# debt* which was 14; er cent of foreign exchange reserves in 1990-91* declined to :ust ; er cent in 0000-03. /% ta(ing into account the residualAre#aining #aturit% within the co# onent of short-ter# debt* it still re#ains #odest at $ 10. 4 billion or 11.4 er cent of total external debt b% end-"ece#ber 00035Table 86. 5able /: Indicators of Debt S#stainabilit' for India Kear &olvenc% Indicators "&= I&= "!"$ 9i,uidit% Indicators &T"AT" &T"A-?=

1990-91 38.3 18.8 08.4 10.0 14;.8 1991-90 30.0 13.0 38.4 8.3 4;.4 1990-93 04.8 10.8 34.8 4.0 ;4.8 1993-94 08.4 10.8 33.8 3.9 18.8 1994-98 0;.0 9.4 30.8 4.3 1;.9 1998-9; 04.3 8.8 04.0 8.4 03.0 199;-94 01.0 4.3 04.8 4.0 08.8 1994-98 19.0 4.8 04.3 8.4 14.0 1998-99 14.8 4.8 03.; 4.4 13.0 1999-00 1;.0 4.3 00.1 4.0 10.3 0000-01 14.0 ;.; 00.4 3.; 8.; 0001-00 13.9 8.4 01.0 0.8 8.1 0000-03 14.4 4.1 00.3 4.4 ;.1 "&= N "ebt &ervice =atio3 I&= N Interest &ervice =atio3 "!"$ N "ebt to !ross "o#estic $roduct =atio3 &T" N &hort-Ter# "ebt3 T" N Total "ebt3 -?= N -oreign ?xchange =eserves. So#rce 1 =eserve /an( of India 5able >: India?s Short 5erm External Debt b' Resid#al Mat#rit'7E& $ #illion6 1998 1999 0000 0001 0000 &hort-ter# debt b% original #aturit% 8*04; 4*044 3*93; 3*;08 0*448 58.46 54.46 54.06 53.;6 50.86 9ong-ter# debt #aturing within one ;*403 4*089 8*389 ;*4;4 11*4;8 %ea 54.06 54.36 58.86 5;.46 511.;6 Total &hort-ter# debt b% residual #aturit% 11*4;9 11*333 10*098 10*398 14*010

510.;6 511.46 510.86 510.36 514.46 @ote : -igures in the brac(et re resent er cent to total external debt. So#rce : India)s ?xternal "ebt1 7 &tatus =e ort* Gune 0003.

120

(otal External e!t an) Foreign *urren'+ ,--et-

100

80 /0 1 2illion

60

40

20

0 En) En) En) En) En) En) En) En) En) En) En) En) .ar 91 .ar 92 .ar 93 .ar 94 .ar 95 .ar 96 .ar 97 .ar 98 .ar 99 .ar 00 .ar 01 .ar 02 Total External Debt Foreign Currency Assets En) En) e' 02 .ar 03 En) e' 03

Table 81 =eserve Indicators for India Kear I# ort >over =eserves to =eserves to of ?xternal &hort Ter# =eserves5#ont "ebt debt hs6 1990-91 0.8 4.0 ;8.3 1991-90 8.3 10.8 130.4 1990-93 4.9 10.9 188.1 1993-94 8.; 00.8 830.9 1994-98 8.4 08.4 890.0 1998-9; ;.0 03.1 430.8 199;-94 ;.8 08.3 390.8 1994-98 ;.9 31.4 880.0 1998-99 8.0 33.8 4;0.0 1999-00 8.0 38.4 9;;.4 0000-01 8.; 41.8 1*1;8.4 0001-00 11.3 84.8 1*941.1 0000-03 13.8 40.0 1*;80.9 So#rce 1 =eserve /an( of India The level of foreign exchange reserves went u fro# :ust 0.8 #onths of i# ort cover during 1990-91 is currentl% sufficient for over a %ear i# orts. The build u reserves were an outco#e of the ca ital account o ening in India as well as official olic% (ee ing in view the factors such as the level of current account deficit3 the si'e of short-ter#

liabilities* debt servicing* the ossible variabilit% in ortfolio invest#ents and other t% es of ca ital flows3 unantici ated ressures on the balance of a%#ents arising out of external shoc(s such as oil rice hi(es. 9oo(ing at the sectoral co# osition of external debt one finds that the share of govern#ent and govern#ent guaranteed debt account for about 48 er cent of total external debt in "ece#ber 0003. "ebt contracted b% the cor orate sector* which also include govern#ent owned ublic sector underta(ings* are showing an increasing trend.
Table ;1 !overn#ent !uaranteed ?xternal "ebt5$ .illions6 233/ 233+ 2334 1 !ovt. "ebt 88943 83098 4;800 0 Con-!ovt "ebt 3;480 40;38 44011 4 Total ?xternal "ebt51O06 90;98 93430 93831 of which with !ovt.!uaranteeB1 3 5aObOc6 108;8 8848 40;9 a. -inancial &ector 1409 1098 0303 b. $ublic &ector 8833 4040 4;08 c.$rivate &ector 30; 344 341 8 !ovt. "ebt and !uaranteed "ebt51O36 ;;811 ;1;40 83489 $ercent of !ovt."ebt and !uaranteed ; "ebt to Total ?xternal "ebt58A46 41.8 ;8.8 84.8 $ercent of !ovt. !uaranteed "ebt to 4 Con-!ovt "ebt53A06 08.8 01.0 18.8 2333 -..2 -..- -..9 4;134 44004 43;19 48;44 80449 84108 88138 ;;483 9;88; 101130 98484 110130 4144 ;318 049; 1409 43;3 4;39 318 044 83311 80340 88.0 14.1 49.8 11.1 4000 ;881 14;1 1804 8040 4988 191 89 80;41 80498 81.3 10.4 4;.8 11.0

>o# aring the external debt indicators of the to 18 debtor countries for the %ears 1990 and 0001 one observes ver% co#fortable situation for India5Table 46. India)s debt had grown at 18 er cent as co# ared to over 300 ercent rise in Forea* >hina* .ala%sia and =ussian -ederation and over 000 er cent rise in 7rgentina* /ra'il* >hile* >olo#bia* Indonesia and Tur(e%. .ost of the solvenc% indicators for India has shown erce tible i# rove#ent during the decade and fare well fro# a#ong the to fifteen indebted countries1 level of external debt to ex orts of goods and services* external debt to !C$* debt service ratio and interest service ratio* etc all show considerable i# rove#ent during the decade. The ad:ust#ents in the debt indicators are far better for India as co# ared to all other debt countries* articularl% in the ost 7sian crisis %ears.

&omposition of &apital Flo8s

The attern of ca ital flows into India reveals a shift in its co# osition* fro# debt to nondebt creating flows with decreasing i# ortance of short-ter# flows such as foreign currenc% de osits and short ter# debt* and an increasing share of foreign direct and ortfolio invest#ent flows5Table 86. The share of non-debt flows in total ca ital flows have increased to 4;.; er cent during 0000-03. $ortfolio invest#ents flows fro# -IIs are allowed since 1993* the cu#ulative invest#ent of which was $ 19 billion in 0003 with about 10 er cent of the total #ar(et ca itali'ation of the Indian stoc( #ar(et.

Table 41 >o# arison of ?xternal "ebt Indicators of To -ifteen "ebtor >ountries

"ebt +utstanding 5$ billion6 1990 0001 ;0.0 13;.4 100.0 00;.4 19.0 38.4 88.3 140.1 14.0 3;.4 49<4 34<4 ;9.9 138.4 38.0 110.1 18.3 43.4 104.4 188.3 30.; 80.4 49.4 ;0.4 89.3 180.; 08.1 ;4.4 49.4 118.1 >oncessional $$! to Total "ebt "ebt to Total "ebt5J6 1990 0001 1990 0001 0.8 1.0 48.3 48.1 0.8 1.0 43.0 41.3 1.9 0.9 84.0 14.8 14.; 18.4 80.3 83.9 8.4 0.4 88.0 89.3 /><3 9+<. 4/<3 4><. 0;.4 00.4 ;8.4 80.4 10.; 0.3 83.4 30.; 14.; 4.3 48.; 88.8 0.8 0.4 40.4 84.8 00.0 01.3 48.; ;8.3 4.4 9.9 49.8 39.8 0.0 0.0 80.1 ;;.8 18.0 10.; 44.4 39.0 18.1 3.8 48.; 48.; ?xternal "ebt to >urrent recei ts 1990 343.4 308.8 149.; 91.4 181.0 9-4<3 033.9 48.; 44.4 191.4 030.1 081.3 .. 89.8 19;.1 0001 343.4 314.4 1;0.; 84.9 010.; 2-2<+ 008.9 88.8 41.; 88.8 108.1 113.8 108.0 84.0 008.4 ?xternal debt to "ebt &ervice =atio national Inco#e 1990 4;.0 0;.8 ;4.3 18.0 48.1 -4<, ;4.0 13.8 3;.4 41.1 ;9.4 88.8 10.3 33.3 30.8 0001 80.8 4;.9 ;0.0 18.0 4;.0 -2<. 94.0 0;.1 84.4 0;.0 ;9.0 38.4 80.9 ;0.4 48.8 1990 34.0 00.0 08.9 11.4 40.9 9><9 33.3 10.8 10.; 00.4 04.0 4.9 .. 1;.9 09.4 0001 ;;.3 48.4 08.1 4.8 3;.1 29<3 03.; 13.8 ;.0 0;.1 18.; 08.0 14.8 08.1 40.0 Interest &ervice =atio 1990 1;.3 ;.1 1;.4 8.4 14.9 2><> 13.3 3.4 3.4 13.4 13.3 1.4 .. ;.8 13.8 0001 09.9 03.; 8.3 0.8 18.3 ></ 8.9 0.8 0.1 ;.9 ;.4 8.0 ;.; 4.1 11.1 &hort Ter# "ebt &hort Ter# "ebt to to Total "ebt =eserves 1990 1;.8 19.8 14.; 1;.8 8.4 2.<18.9 30.9 10.4 18.4 14.8 19.4 19.9 09.; 19.0 0001 14.; 10.8 ;.4 08.8 10.0 -<4 1;.1 31.9 11.8 11.4 11.; 11.0 13.4 19.; 14.0 1990 008.1 318.4 88.4 31.8 31.1 9+></ 149.3 43.0 19.8 1;3.1 449.1 013.; .. ;0.; 184.0 0001 134.4 49.1 14.8 00.4 3;.8 ></ 80.0 34.0 1;.4 40.0 48.0 04.0 ;4.4 40.9 8;.;

>ountr% 7rgentina /ra'il >hile >hina >olo#bia India Indonesia Forea* =e . .ala%sia .exico $hili ines $oland =ussian -ed Thailand Tur(e%

5able 3: &omposition of &apital Inflo8s to India

T% es of -lows 1990-91 1998- 1994- 1999-00 0000-01 0001- 00009; 98 00 03 5otal @et &apital Inflo8s7; bn= ,<2 /<2 3<4 2.</ 2.<. 2.<+ 2-<2 Per cent Con-debt >reating Inflows 1.8 114.8 84.8 49.4 ;4.8 44.1 4;.; a6 -"I 1.4 80.4 3;.0 00.4 40.0 88.0 38.8 b6 $ortfolio Invest#ent 0.1 ;8.1 18.; 09.0 04.; 19.1 8.1 "ebt >reating Inflows 83.3 84.4 80.4 03.1 89.4 9.0 -10.; a6 ?xternal 7ssistance 31.3 01.; 9.0 8.; 4.3 11.4 -00.0 b6 ?>/ P 31.9 31.0 40.; 3.0 34.0 -14.9 -19.4 c6 &hort- ter# >redits 18.0 1.0 -1.0 3.; 1.0 -8.4 8.1 d6 C=I "e osits 01.8 04.0 11.4 14.4 03.1 0;.0 04.; e6 =u ee "ebt &ervice -1;.9 -03.3 -4.8 -;.8 -;.0 -4.9 -3.9 +ther >a ital Q 18.0 -48.0 -4.0 04.0 -04.0 13.4 ;4.0 Total 51 to 36 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Memo: ?xcluding b R cB 84.4 33.4 80.4 ;4.4 41.4 89.3 83.8

P =efers to #ediu# and long-ter# borrowings So#rce : =eserve /an( of India. 5able 2.: Portfolio Investment In India7 1S ; Million= !"=sA7"=sP -IIsB +ffshore funds Total 1990-93 040 1 3 044 1993-94 1*800 1*;;8 380 3*8;4 1994-98 0*080 1*803 039 3*804 1998-9; ;83 0*009 8; 0*448 199;-94 1*3;; 1*90; 00 3*310 1994-98 ;48 949 004 1*808 1998-99 040 -390 89 -;1 1999-00 4;8 0*138 103 3*00; 0000-01 831 1*844 80 0*4;0 0001-00 444 1*808 39 0*001 0000-03 ;00 344 0 949 P 1 =e resents the a#ount raised b% Indian cor orates through !lobal "e ositor% =ecei ts 5!"=s6 and 7#erican "e ositor% =ecei ts 57"=s6. B 1 =e resents fresh inflow of funds b% -oreign Institutional Investors. So#rce 1 =eserve /an( of India

Special P#rpose External &ommercial 0orro8ing

The Indian !overn#ent had obtained external borrowing using s ecial rovisions three ti#es since 19911 India "evelo #ent /onds 5I"/s6* 19913 =esurgent India /onds

5=I/s6* 19983 and* India .illenniu# "e osits 5I."s6* 0000. These borrowings were used onl% to #eet the unfavorable external circu#stances* and served as alternative to sovereign borrowings. The #aturit% of these issuances were about five %ears* #ostl% subscribed b% non-resident Indians* with rede# tion onl% at #aturit% and offering reasonable s read over co# arable govern#ent bond %ields. These instru#ents were considered as substitutes for foreign currenc% de osits* which extended the duration of the countr%)s debt rofile. 5able 22: Special 0orro8ings b' India since 2332 T% e of /orrowings 7#ount5E& $ Interest 8-Kear & read .illion6 =ate5J6 !overn#ent 5>ol 3-46 /ond Kield India Millenni#m DepositsA -... >A>-. .obili'ation in E& "ollar 8*180 8.80 8.84 0.93 .obili'ation in $ound &terling 088 4.88 4.;3 3.00 .obili'ation in ?uro 80 ;.88 Res#rgent India 0ondsA 2334 /A-9. .obili'ation in E& "ollar 3*984 4.48 8.0; 0.49 .obili'ation in $ound &terling 180 8.00 8.48 0.88 .obili'ation in ?uro ;3 ;.08 India Development 0ondsA 2332 2A+-, .obili'ation in E& "ollar 1*304 9.80 4.8; 1.;4 .obili'ation in $ound &terling 300 13.08 9.90 3.33 So#rce: India)s ?xternal "ebt1 7 &tatus =e ort* !overn#ent of India* +ctober 0001.

Foreign &#rrenc' Deposits

.an% countries allow foreign currenc% de osits fro# ex atriates as a source for balance of a%#ents financing. &uch sche#es were introduced in India in 1940 allowing non=esident IndiansA+verseas >or orate /odies to lace de osits deno#inated in foreign currenc% as well as local currenc% with the Indian ban(s* with interest rate fixed and exchange rate guaranteed b% the =eserve /an( of India. The two oil shoc(s of 1940s brought substantial a#ount of E& dollar de osits fro# the gulf countries. /% the end of .arch 1990* the total C=I de osits were to the extent of $ 10 billion. @owever these short-ter# de osits have roved to be ver% volatile* res onding to #acroecono#ic instabilit% as well as olitical ris(s. The external a%#ents difficulties of 1990-91 de#onstrated the vulnerabilit% associated with these de osits. >onsidering the huge fiscal costs of exchange guarantee and higher interest rates offered on such de osits as co# ared to international rates* the olic% later %ears withdrew the exchange rate guarantee and reduced considerabl% the interest rate s read. 7 sche#e called Con-resident Con-re atriable =u ee "e osit 5C=5C=6="6 was also introduced in order to avoid the reversibilit% character of the de osits* but was later withdrawn in 7 ril 0000.

*o3po-ition of External e!t a- at En) e' 2003 40hare in 56

Rupee e!t 25 NR7 epo-it 275

0hort ter3 e!t 55 .ultilateral 285

*o33er'ial e!t 2ilateral 185 Export *re)it 165 45

Table 101 +utstanding /alances C=I "e osit &che#es 5E& $ #illion6 ?nd- C=5?6=7 ->C=576 ->C=5/6 C=5C=6=" ->5+6C Total .arch B BB 1948 40 S S S S 40 1980 88; 188 S S S 1*044 1988 0*304 440 S S S 3*044 1990 3*444 8*;38 S S S 10*418 1998 4*88; 4*081 3*0;3 0*48; 10 14*1;; 199; 3*91; 4*088 8*400 3*840 13 14*44; 1994 4*983 0*30; 4*49; 8*;04 4 00*393 1998 8*;34 1 8*4;4 ;*0;0 0 00*3;9 1999 ;*048 S 4*838 ;*;18 S 00*498 0000 ;*488 S 8*140 ;*484 S 01*;84 0001 4*144 S 9*04; ;*849 S 03*040 0000 8*449 S 9*;43 4*080 S 08*144 0003 14*903 S 10*199 3*404 S 08*809 B 12ithdrawn effective 7ugust 1994. BB 12ithdrawn effective 7 ril 0000. So#rce : =eserve /an( of India.

Polic' Perspectives Bn External Debt Management

The debt #anage#ent olic% following the balance of a%#ents crisis evolved into a #ulti- ronged strateg%. This evolving olic% regi#e was based broadl% on the
reco##endations of the =angara:an >o##ittee 519936 which i# lied 5i6 the continuation of an annual ca * #ini#u# #aturit% restrictions and rioriti'ing the use of ?>/s3 5ii6 9I/+= based ceilings on interest rates and #ini#u# #aturit% re,uire#ents on C=I de osits to discourage the volatile co# onent of such de osits3 5iii6 contain#ent of shortter# debt together with controls to revent its undue increase in future3 5iv6 retiringA restructuringA refinancing of #ore ex ensive external debt3 5v6 #easures to encourage non-debt creating financial flows such as foreign direct and ortfolio invest#ents3 5vi6 incentives and sche#es to ro#ote ex orts and other current recei ts3 and 5vii6 conscious build-u of foreign exchange reserves to rovide effective insurance against external sector uncertainties. These olicies ursued with var%ing intensit% %ielded good results in #a(ing a turnaround in India)s external debt scenario* which is reflected in the sustained i# rove#ent in her (e% debt indicators. 7 trans arent olic% on external co##ercial borrowings with the stated ob:ectives of rudent debt #anage#ent see#s to have e#erged in recent %ears. India began considering the need for a $ublic "ebt .anage#ent +ffice in 0000. 7ttention was focused on building u of the institutional ca abilit% for debt anal%sis for effective ublic debt #anage#ent and an a ro riate institutional structure for it in the ublic sector. The institutional arrange#ent of debt re orting is shared between the .inistr% of -inance 5.+-6 and the =eserve /an( of India 5=/I6* with the ?xternal "ebt .anage#ent Enit 5?".E6 in the .inistr% of -inance serving as the a ex unit for #onitoring* co# uteri'ation and #anage#ent related decisions. The #a:orit% of the countr%)s total external debt data relating to external assistance and external co##ercial borrowings have been co# uteri'ed on the >o##onwealth &ecretariat "ebt =ecording and .anage#ent &%ste#5>& 1 "=.&6. The ?>/ guidelines issued b% the .inistr% of -inance fro# ti#e to ti#e ut a ca on the overall a#ounts that can be borrowed in a financial %ear* allowing a longer #aturit% for larger borrowing* ca s on borrowing cost and restrictions on end-use5&ee the 7 endix6. These restrictions have roved to be hel ful in avoiding debt-servicing difficulties. The annual review of a ca on ?>/ is fixed considering the re,uire#ent of different

sectors and the #ediu# ter# balance of a%#ents scenario. ?>/ a rovals are #onitored regularl% to ensure that the total debt is #aintained within the li#its of debt #anage#ent.
The ?>/ guidelines in a wa% i# ose restrictions on the leveraging ca abilities of Indian co# anies in ter#s of the a#ounts and the eriods for which the borrowings can be #ade. >or orate access external co##ercial borrowings for ex ansion of existing ca acities as well as for fresh invest#ent. 7t the #o#ent different rules a l% for different for#s of financing which therefore restricts the choice of financing available.

In this wa%* to a large extent* funding de ends u on the govern#ent rules rather than the characteristics of the ro:ects. There are no sovereign guarantee3 cor orate toda% access oversees ca ital #ar(ets based on the strength of their balance-sheet and their brand. The govern#ent has relaxed recentl% to re a% external debt* thus the ossibilities for lowering the interest costs due to falling interest rate environ#ent. The concern is graduall% shifting towards #anaging cor orate borrowing* as the volu#e of external debt on the govern#ent account has been decreasing. >or orate can also

underta(e liabilit% #anage#ent for hedging the interest and exchange rate ris(s on their underl%ing foreign currenc% ex osures without rior a roval of the .inistr% of -inance or the =eserve /an( of India. The olic% gives greater riorit% for ro:ects in the infrastructure* core and ex ort sectors. The regulator% structure has been evolving to influence the activities that would
be financed through external borrowings* thereb% restricting the funds fro# rec%cling into financial #ar(ets as well as real estate. To lengthen the #aturit% rofile of external

debt* co##ercial borrowings of eight %ears and above are (e t outside the ceiling. Fee ing in view the volatilit% the short ter# ca ital flows are #onitored and restricted #ostl% for trade related ur oses. 7s regards the foreign currenc% and local currenc% deno#inated de osits* fro# the non-resident Indians* there has been significant changes in ter#s of the re#oval of exchange guarantees rovided b% ban(s* gradual shift in olic% in favor of local currenc% deno#inated de osits* ro#otion of non-re atriable de osits* and aligning interest rates to international rates such as 9I/+=.
5he F#t#re !iven the sustainable level of current account and foreign exchange reserves in India* it is ver% unli(el% that the foreign exchange situation beco#es critical again. It also see#s unli(el% that international investors will substantiall% reduce their ex osure* given the strong funda#entals of the Indian econo#%. ?xternal debt #anage#ent will continue to be an area of high riorit% in the context of overall #anage#ent of the Indian econo#%. To consolidate the gains alread% #ade* the focus of external debt #anage#ent olic% should stress on high growth rate of ex orts* (ee ing the #aturit% structure as well as the total a#ount of co##ercial debt under #anageable li#its* tight control on short-ter# debt* and encouraging non-debt creating foreign invest#ents flows. These co#bined with the olic% efforts ai#ed at achieving a co##ensurate growth in current recei ts to service the existing debt will hel retain the sustainabilit% status in the long run.

6ppendix External &ommercial 0orro8ings Polic' )#idelines

?xternal >o##ercial /orrowings 5?>/6 refer to co##ercial loans availed fro# non-resident lenders with #ini#u# average #aturit% of 3 %ears. /orrowers can raise ?>/ fro# internationall% recogni'ed sources such as 5i6 international ban(s* international ca ital #ar(ets* #ultilateral financial institutions 5such as I->* 7"/6 5ii6 ex ort credit agencies and 5iii6 su liers of e,ui #ent* foreign collaborators and foreign e,uit% holders. 6< 6ccess Mechanism Ender the resent fra#ewor(* ?>/ can be raised through two routes vi'. 5i6 7uto#atic =oute and 5ii6 7 roval =oute. 7i= 5ii6 6#tomatic Ro#te Eligible 0orro8ers : >or orates registered under the >o# anies 7ct exce t financial inter#ediaries 5such as ban(s* financial institutions) 5-is6* housing finance co# anies and C/->s6 are eligible. &ases considered : 5i6 E to E&" 00 #illion or e,uivalent with #ini#u# average #aturit% of 3 %ears. 5ii6 7bove E&" 00 #illion and u to E&" 800 #illion or e,uivalent with #ini#u# #aturit% of 8 %ears. Eligible 0orro8ers : a6 -inancial Institution dealing exclusivel% with infrastructure or ex ort finance will be considered on a case b% case basis. b6 /an(s and -inancial Institutions which have artici ated in the textile or steel sector restructuring ac(ages a roved b% the !overn#ent will also be er#itted to the extent of their invest#ent in the ac(age and assess#ent b% =/I based on rudential nor#s. &ases considered : cases falling outside the urview of the auto#atic route li#its and #aturit% eriod #entioned earlier. &uch cases falling under the 7 roval =oute will be considered b% an ?# owered >o##ittee of the =/I. 0< )eneral terms and conditions : 6ll(in(cost ceilings The resent all-in-cost ceilings for ?>/ are as follows 1 Mat#rit' 6ll(in(cots ceilingC over + month !I0BR i6 3 %ears and u to 8 %ears 000 basis oints ii6 .ore than 8 %ears 380 basis oints B 7ll-in-cost ceiling includes rate of interest* other fees and ex enses in foreign currenc% exce t co##it#ent fee* re a%#ent fee* and fees a%able in Indian ru ees. 7lso* a%#ent of withholding tax is excluded for calculating the all-in-cost. End(#se 5i6 ?>/ can be raised onl% for invest#ent 5such as i# ort of ca ital goods* new ro:ects* #oderni'ationAex ansion of existing roduction units6 in the real sector-industrial sector including s#all and #ediu# enter rises and infrastructure sector in India. 5ii6 5iii6 5iv6 Etilisation of ?>/ roceeds is er#itted in the first stage ac,uisition of shares in the disinvest#ents rocess and in the #andator% second stage offer to the ublic under the disinvest#ents rogra##e of $&E shares. Etilisation of ?>/ roceeds is not er#itted for on-lending or invest#ent in ca ital #ar(et b% cor orates. Etilisation of ?>/ roceeds is not er#itted in real estate . T=eal ?state) excludes develo #ent of integrated townshi s as er rovisions of $ress Cote Co. 3 50000 series6 dated 4.1.0000 of the "A+ Industrial $olic% R $ro#otion. ?nd-uses of ?>/ for wor(ing ca ital* general cor orate ur ose and re a%#ent of existing ru ee loans are not er#itted.

5v6

&< Pa'ments $re a%#ent of ?>/ u to E&" 100 #illion is er#itted without rior a roval of =/I* sub:ect to co# liance with sti ulated #ini#u# average #aturit% eriod as a licable for the loan. 7iii= Refinance of existing E&0 =efinancing of existing ?>/ b% raising fresh loans at lower cost is er#itted* sub:ect to the condition that the outstanding #aturit% of the original loan is #aintained. E< Foreign &#rrenc' &onvertible 0onds 7F&&0= The liberali'ation nor#s a licable to ?>/ are also extended to ->>/ in all res ects.

So#rce: India?s External Debt : 6 Stat#s ReportA )overnment of IndiaA -..9 .