Professional Documents
Culture Documents
DEBT
Research Report
By
Abhishek Patil (2013F01)
Adarsh Sinha (2013F02)
Llyod Dsouza (2013F03)
Omkar Ambekar (2013F04)
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Index:
Sr.
No.
1
2
3
4
5
6
7
Description
Indias Historic Wealth
What is External Debt?
Overview of Indias External
Debt
Analysis of Indias External
Debt
Key Reasons for External
Debt
Future Trend
Recommended Actions for
Improvement
Page Number
2 -3
4-5
6- 8
9-16
17-18
19
20
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Prof. Williamson and Clingingsmith have noted that between 1772 and 1815
there was a huge net financial transfer from India to Britain in the form of Indian
goods. The drain resulting from contact with the West was the excess of
exports from India for which there was no equivalent import included a
bewildering variety of cotton goods for re-export or domestic [consumption], and
the superior grade of saltpeter that gave British cannon an edge
Javier Cuenca Esteban estimates these net financial transfers from India to
Britain reached a peak of 1,014,000 annually in 1784-1792 before declining to
477,000 in 1808-1815 .
However even this high figures are significantly lower than the estimates by Prof
John Richards (cited later in this essay). Like all other commentators, Maddison
too has mentioned the debilitating effect of the drain of funds from
India: Another important effect of foreign rule on the long-run growth potential
of the economy was the fact that a large part of its potential savings were
siphoned abroad.
This 'drain' of funds from India to the UK has been a point of major controversy
between Indian nationalist historians and defenders of the British raj. However,
the only real grounds for controversy are statistical. There can be no denial that
there was a substantial outflow which lasted for 190 years. If these funds had
been invested in India they could have made a significant contribution to raising
income levels.
In short they looted an Indian's self image, self-reliance and mutual trust and
respect which continues to this day and can be considered the biggest intangible
yet costliest loot.
Now coming to the point of how much was "Looted". The estimates vary from as
low as around 100,000 pounds every annum during Mughal times to 35 Million
pounds or so by Dadabhai Nauroji. Till the battle of Plassey, India of course had a
big trade surplus with the World who had nothing to offer except gold in
exchange for textiles, silk and spices. But once the British won the battle of
Plassey, the great loot of Bengal started and they had a monopoly on trade and
basically funded everything from their industrial revolution to high taxes for
British goods in America to the World wars Britain fought successfully. Basically
in 200 years of British rule India was transformed from one of the World's
wealthiest nation (along with China controlled World's 70-80% GDP for past 20 or
so centuries) to one of the poorest.
Poverty in India:
Poverty in India is widespread, with the nation estimated to have a third of the
world's poor. In 2010, the World Bank reported that 32.7% of all people in India
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fall below the international poverty line of US$ 1.25 per day (PPP) while 68.7%
live on less than US$ 2 per day.
According to 2010 data from the United Nations Development Programme, an
estimated 29.8% of Indians live below the country's national poverty line. A 2010
report by the Oxford Poverty and Human Development Initiative (OPHI) states
that 8 Indian states have 421 million poor people more poor people than SubSaharan Africa. A 2013 UN report stated that a third of the worlds poorest people
live in India.
The latest UNICEF data shows that one in three malnourished children worldwide
are found in India, whilst 42% of the nation's children under five years of age are
underweight. It also shows that a total of 58% of children under five surveyed
were stunted. Rohini Mukherjee, of the Naandi foundation one of the NGOs that
published the report stated India is "doing worse than sub-Saharan Africa.
External Debt
External debt (or foreign debt) is that part of the total debt in a country that is
owed to creditors outside the country. The debtors can be the government,
corporations or citizens of that country. The debt includes money owed to private
commercial banks, other governments, or international financial institutions such
as the International Monetary Fund (IMF) and World Bank.
PEP defines it as "Gross external debt, at any given time, is the outstanding
amount of those actual current, and not contingent, liabilities that require
payment(s) of principal and/or interest by the debtor at some point(s) in the
future and that are owed to nonresidents by residents of an economy"
In this definition, IMF defines the key elements as follows:
Outstanding and Actual Current Liabilities
For this purpose, the decisive consideration is whether a creditor owns a claim on
the debtor. Here debt liabilities include arrears of both principal and interest.
Principal and Interest
When this cost is paid periodically, as commonly occurs, it is known as an
interest payment. All other payments of economic value by the debtor to the
creditor that reduce the principal amount outstanding are known as principal
payments. However, the definition of external debt does not distinguish between
whether the payments that are required are principal or interest, or both. Also,
the definition does not specify that the timing of the future payments of principal
and/or interest need be known for a liability to be classified as debt.
Residence
To qualify as external debt, the debt liabilities must be owed by a resident to a
nonresident. Residence is determined by where the debtor and creditor have
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There are various indicators for determining a sustainable level of external debt.
While each has its own advantage and peculiarity to deal with particular
situations, there is no unanimous opinion amongst economists as to one sole
indicator. These indicators are primarily in the nature of ratios i.e. comparison
between two heads and the relation thereon and thus facilitate the policy makers
in their external debt management exercise. These indicators can be thought of
as measures of the countrys solvency in that they consider the stock of debt
at certain time in relation to the countrys ability to generate resources to repay
the outstanding balance.
Examples of debt burden indicators include the
(a) debt to GDP ratio,
(b) foreign debt to exports ratio,
(c) government debt to current fiscal revenue ratio etc.
This set of indicators also covers the structure of the outstanding debt including
the
(d) share of foreign debt,
(e) short-term debt, and
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Overview
1.1 Indias external debt stock stood at US$ 390.0 billion at end-March 2013
as against the
end-March 2012 level of US$ 345.5 billion. The increase in external debt was
primarily on account ofrise in short-term trade credit, commercial borrowings,
and non-resident Indian deposits. The growth inexternal debt was 12.9 per
cent at end-March 2013 broadly the same as at end-March 2012.
However,the external debt-GDP ratio rose to 21.2 per cent at end-March
2013, as against 19.7 per cent at end-March 2012, reflecting mainly the
depreciation of the rupee that led to a marginal contraction in thenominal
GDP in US dollar terms.
1.2 The composition of Indias external debt is undergoing a change with the
share ofmultilateral and bilateral debt in total external debt rapidly
diminishing over the years, while that ofcommercial borrowings and NRI
deposits rising. At end-March 2013, the share of commercial
borrowings in total external debt stock stood at 31.0 per cent, followed by
short-term debt1 (24.8 percent), NRI deposits (18.2 per cent) and multilateral
debt (13.2 per cent).
1.3 The maturity profile of Indias external debt indicates dominance of longtermborrowings. At end-March 2013, the long-term debt accounted for 75.2
per cent of total external debt,while the remaining was short-term debt. The
long-term debt at US$ 293.4 billion at end-March 2013
reflected an increase of 9.7 per cent, while the short-term debt at US$ 96.7
billion increased by 23.7 percent over the level of end-March 2012.
1.4 Government (Sovereign) external debt at end-March 2013 stood at US$
81.7 billionvis-a-vis US$ 81.9 billion at end-March 2012. The share of
Government external debt in total externaldebt has declined over the years.
Government external debt accounted for 20.9 per cent of the totalexternal
debt at end-March 2013 as against 23.7 per cent at end-March 2012.
1.5 The currency composition of Indias external debt shows continued
dominance of USdollar, accounting for 57.2 per cent of total external debt at
end-March 2013. This is followed by theIndian rupee (24.0 per cent), SDR (7.5
per cent) and Japanese yen (6.3 per cent). The rupee denominateddebt
comprises outstanding state credits extended to India by the erstwhile Union
of Soviet SocialistRepublic (USSR), rupee denominated NRI deposits, Foreign
Institutional Investors (FII) investmentsin Government Treasury Bills/dated
securities and corporate debt securities.
1.6 The valuation effect reflecting the appreciation of US dollar in the
international marketmoderated the increase in Indias external debt.
Excluding the valuation effect, the stock of external debtat end-March 2013
would have increased by US$ 55.8 billion over the level at end-March 2012.
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Borrower Classification
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Concessional Debt
Concessionality of external debt indicates softer terms of a loan in relation to
prevailing
market conditions. Concessionality could be reflected in terms of lower rate of
interest, longer grace orrepayment periods and is measured by the difference
between the face value of a credit and the sum ofthe discounted future debt
service payments.
Different multilateral institutions follow different norms for classifying credits
intoconcessional and non-concessional. In India, loans from International
Development Association (IDA),International Fund for Agricultural
Development (IFAD), Rupee debt are categorized as concessional.The
proportion of concessional loans in total external debt has declined steadily
from 23.0 per cent in2007 to 11.7 per cent at end-March 2013 (Figures 2.9
and 2.10 and Table 2.11). The decline in the shareof concessional debt
reflects the declining share of multilateral and bilateral debt in Indias total
externaldebt.
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Debt Composition:
The composition of multilateral and bilateral sovereign debt at endMarch2013 is presented in the Figures 5.4 and 5.5. International
Development Association(IDA) accounts for the bulk (59.9 per cent), followed
by the International Bank forReconstruction and Development (IBRD, 20.5 per
cent), the Asian Development Bank(ADB, 18.8 per cent), the International
Fund for Agricultural Development (IFAD, 0.8per cent) and Others (0.1 per
cent). In the bilateral sovereign debt, a substantial portionis accounted by
Japan (75.9 per cent), followed by Germany (14.4 per cent), Russia (6.6per
cent) and France (1.6 per cent) and United States (1.5 per cent) (Figure 5.5).
The composition of the countrys multilateral sovereign debt is
undergoingchanges over the years. The share of IDA in total multilateral
sovereign debt hasdecreased from around 73.3 per cent in 2008 to 59.9 per
cent at end-March 2013, whilethat of IBRD increased from 16.5 per cent to
20.5 per cent over the same period. Theshare of ADB also increased to 18.8
per cent at end-March 2013 from 10.1 per cent atend-March 2008
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Currency Composition:
The currency composition indicates that SDR continues to remain the
predominantcurrency in sovereign external debt, primarily due to borrowings
from IDA. The share of SDRstood at 36.0 per cent, (Table 5.2) followed by the
US dollar (26.3 per cent), Indian rupee (17.7per cent), Japanese yen (16.5 per
cent) and the Euro (3.5 per cent) at end-March 2013 . This in conjunction with
the earlier composition at end-March 2008 reflects some shifts(Figure 5.6 and
5.7).
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But such cheap money has made many emerging economies complacent about
receiving inward capital flows without creating the necessary policy framework to
strengthen the sinews of their domestic industry. In the four years after 2008,
Indias own experience has been one of losing its export competitiveness relative
to other developing countries. This has decelerated our export earnings. Added
to this is our mounting import bill, largely led by rising oil prices. The massive
increase in gold imports further added to our woes. The double whammy of
decelerating exports and rising imports has resulted in India becoming one of the
highest current account deficit nations, at nearly 5 per cent of GDP annually.
India needs at least $90 billion of fresh capital inflows a year to meet its current
account deficit. It could become particularly vulnerable if the U.S. Federal
Reserve decides to partially roll back its cheap money policy in the months
ahead. Cheap global money, which had enabled Indian corporates and financial
institutions to accumulate more and more debt, will certainly not continue for
long. India must begin to prepare for such a contingency. The only way out of this
predicament is for the Manmohan Singh government to build a consensus among
political parties to rebuild the economy on a war footing. But with general
elections less than a year away, the UPA lacks the political capital to make such
a determined effort to arrest the current economic slide.
At USD 390 billion, the external debt was 13% or USD 44.6 billion higher
compared to the figure a year ago. The magnitude of the increase, as spelt out
by the RBI, was offset to some extent due to valuation change (gain) resulting
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from appreciation of the US dollar against the Indian rupee and other
international currencies. In fact, if the effect of the valuation change is
excluded, the addition in external debt last year would be USD 55.8 billion.
An increase of USD 44.6 billion external debt in one year is a huge amount by
any standard. The question is: Why has the external debt risen so sharply over
the last year? Was it because of the spiralling CAD? The increase in the CAD may
not be the sole reason, but it did fuel the rising trend in external debt. This is
reflected in the sharp rise in Indias short-term debt. Such rise, in fact, was
primarily on account of short-term trade credit. There has also been a sizeable
increase in external commercial borrowings as well as rupee denominated NRI
deposits. The RBI, too, has admitted that the high current account deficit
witnessed during 2012-13 and its financing increasingly through debt flows
particularly by trade credit resulted in a significant rise in Indias external debt
during 2012-13.
What must be of greater concern for the Finance Minister P. Chidambaram is that
the short-term debt maturing within a year stood at USD 172 billion at the end of
fiscal 2012-13. This is bound to add to Indias vulnerability. If capital flows dry up
due to some unforeseen events or NRI deposits slow down, three-fifths of the
countrys forex reserves will be exhausted to repay the short-term debt by March
31, 2014.
If this happens, the country may face a balance of payments crisis as well.
Economists point out that while short-term debt in terms of original maturity is
about 31% of forex reserves, in terms of residual maturity or remaining maturity,
a much larger debt is short-term now. According to the latest figures put out by
the RBI, the share of short-term debt of the total external debt by original
maturity was 24.8% but based on residual maturity it was a huge 44.2% at the
end of the last fiscal. Out of this, the share of NRI deposits was about 28%. That
is, a part of the debt that was originally long-term and is coming up for maturity
now along with some debt exposure being un-hedged, will put serious pressure
on the currency. Unless the debt is rolled over for a longer period, there will be
pressure on balance of payments and on the current account balance as well.
For that matter, India is probably already feeling the pressure on balance of
payments. The import cover of foreign exchange reserves is down to about 6.5
months from 15 months in the pre-global slowdown days when the GDP growth
was touching new highs, capital flows were steady and the currency was strong.
During the second half of last June, Indias foreign exchange reserves depleted
from USD 290 billion on June 14 to USD 287 billion on June 28.
Another big contributor to the rising debt is external commercial borrowings
(ECBs), which account for about a third of the total external debt. The ECBs were
encouraged to enable Indian industries to meet their genuine import costs and
spur growth, but there is no tracking of whether the money raised through ECB is
being used to bridge the gap between borrowings abroad and their utilization at
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home. Thus, while the funds raised through the ECB route have resulted in the
escalation of external debt, such funds are also putting pressure on our
repayment schedule, since a part of it, it is apprehended, is not being used to
create output generating capacity back home.
Future Trend:
The steps taken so far seem to be more from point of view of managing
current situations
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