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External Debt Management
INTRODUCTION TO EXTERNAL DEBT MANAGEMENT

EXTERNAL
DEBT (or foreign debt) is that part of the total debt i a !o" tr# that is
o$ed to !reditors o"tside the !o" tr#% The debtors !a
be the &o'er (e t)
!orporatio s or pri'ate ho"seholds% The debt i !l"des (o e# o$ed to pri'ate !o((er!ial ba *s) other &o'er (e ts) or i ter atio al fi a !ial i stit"tio s s"!h as the IM+ a d ,orld Ba *%
D EFINITION
IM+ defi es it as -Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require ayment!s" of rinci al and#or interest by the debtor at some oint!s" in the future and that are o$ed to nonresidents by residents of an economy%-
I this defi itio ) IM+ defi es the *e# ele(e ts as follo$s.
(a) Outstanding and Actual Current Liabilities. +or this p"rpose) the de!isi'e !o sideratio is $hether a !reditor o$ s a !lai( o the debtor% /ere debt liabilities i !l"de arrears of both pri !ipal a d i terest%
(b) Principal and Interest. ,he this !ost is paid periodi!all#) as !o((o l# o!!"rs) it is * o$ as a i terest pa#(e t% All other pa#(e ts of e!o o(i! 'al"e b# the debtor to the !reditor that red"!e the pri !ipal a(o" t o"tsta di & are * o$ as pri !ipal pa#(e ts% /o$e'er) the defi itio of e0ter al debt does ot disti &"ish bet$ee $hether the pa#(e ts that are re1"ired are pri !ipal or i terest) or both% Also) the defi itio does ot spe!if# that the ti(i & of the f"t"re pa#(e ts of pri !ipal a d2or i terest eed be * o$ for a liabilit# to be !lassified as debt%
(!) Residence. To 1"alif# as e0ter al debt) the debt liabilities ("st be o$ed b# a reside t to a o reside t% Reside !e is deter(i ed b# $here the debtor a d !reditor
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ha'e their !e ters of e!o o(i! i terest 4 t#pi!all#) $here the# are ordi aril# lo!ated 4 a d ot b# their atio alit#% d) Current and Not Contingent. Co ti &e t liabilities are ot i !l"ded i the defi itio of e0ter al debt% These are defi ed as arra &e(e ts " der $hi!h o e or (ore !o ditio s ("st be f"lfilled before a fi a !ial tra sa!tio ta*es pla!e% /o$e'er) fro( the 'ie$poi t of " dersta di & '"l erabilit#) there is a al#ti!al i terest i the pote tial i(pa!t of !o ti &e t liabilities o a e!o o(# a d o parti!"lar i stit"tio al se!tors) s"!h as &o'er (e t%
Ge erall# e0ter al debt is !lassified i to fo"r heads i%e% (5) p"bli! a d p"bli!l# &"ara teed debt) (6) pri'ate o 4&"ara teed !redits) (7) !e tral ba * deposits) a d (8) loa s d"e to the IM+% /o$e'er the e0a!t treat(e t 'aries fro( !o" tr# to !o" tr#% +or e0a(ple) $hile E&#pt (ai tai s this fo"r head !lassifi!atio ) i Credit) (e) Co((er!ial Borro$i &s) (f) NRI Deposits) a d (&) R"pee Debt% I dia it is !lassified i se'e heads i%e% (a) ("ltilateral) (b) bilateral) (!) IM+ loa s) (d) Trade
EXTERNAL DEBT AND MACROECONOMIC CON9IDERATION9
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/o$ forei& borro$i & affe!ts (a!roe!o o(i! stabilit# !a be best " derstood i the !o te0t of prod"!tio ) !o s"(ptio ) sa'i &s) a d i 'est(e t% I a !losed e!o o(# ( o forei& trade)) prod"!tio !o(prises &oods a d ser'i!es for perso al !o s"(ptio (!o s"(er &oods)) !apital &oods (b"ildi &s) pla t a d e1"ip(e t) i 'e tories "sed b# e terprises)) a d &oods a d ser'i!es "sed b# the &o'er (e t) $hi!h !a be both for !o s"(ptio (for !"rre t "se) a d for i 'est(e t% ,here there is forei& trade) prod"!tio also i !l"des &oods for e0port: i(ports are a s"pple(e t to do(esti! !o s"(ptio ) for i 'est(e t) for &o'er (e t "se or for e0ports%
There is a relatio ship bet$ee
prod"!tio
a d i !o(e% ;"t si(pl# prod"!tio
!reates i !o(es e1"al to the 'al"e of o"tp"t% The &o'er (e t i ta0es ta*es so(e i !o(e: so(e is ta0ed: so(e is sa'ed b# the pri'ate se!tor: the bala !e is spe t o !o s"(ptio % +orei& borro$i & is the e0!ess of i(ports of &oods a d ser'i!es o'er e0ports a d et borro$i & !reates debt) $hi!h !a be repaid if e0ports e0!eed i(ports% I the abse !e of forei& borro$i & (e0ports a d i(ports are e1"al)) pri'ate se!tor i 'est(e t pl"s &o'er (e t spe di & is li(ited b# the le'el of pri'ate se!tor sa'i &s a d ta0atio %
E!o o(i! &ro$th) of !o"rse) !o"ld be a!!elerated $ith forei& borro$i &) per(itti & i(ports to e0!eed e0ports a d at the sa(e ti(e) i 'est(e t pl"s &o'er (e t e0pe dit"res to e0!eed sa'i &s pl"s ta0es% There are sta dard i di!ators for (eas"ri & the b"rde of e0ter al debt. the ratios of the sto!* of debt to e0ports a d to &ross atio al prod"!t) a d the ratios of debt ser'i!e to e0ports a d to &o'er (e t re'e "e% Altho"&h there is $idespread a!!epta !e of these ratios as (eas"res of !redit$orthi ess) there are o fir( !riti!al le'els) $hi!h) if e0!eeded) !o stit"te a da &er for the i debted !o" tr#%
/o$e'er) the ,orld Ba * 9taff has proposed a set of para(eters) $hi!h it "ses to de(ar!ate <(oderatel#= a d <se'erel#= i debted !o" tries% Co" tries $ith a rapid e0port &ro$th !a s"pport hi&her debt relati'e to e0ports a d o"tp"t% /ea'il# i debted) ho$e'er) are '"l erable to se'ere (a!roe!o o(i!s sho!*s4sharpl# hi&her i terest rates i the le di & !o" tries) for i sta !e) or si(pl# le ders !"tti & ba!* o
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their !o((it(e ts% +a!ed $ith these press"res) !o" tries ("st the ad>"st b# !"tti & pri'ate i 'est(e t) de!reasi & &o'er (e t e0pe dit"res a d or i !reasi & &o'er (e t re'e "es%
IM;ORTANT A9;ECT9 RELATED TO EXTERNAL DEBT MANAGEMENT

A) F IN%N&ING T E&'NI()E*
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Co" tries ha'e a li(ited abilit# to s"pport e0ter al borro$i &% At the sa(e ti(e) the s"ppl# of fi a !e is also li(ited% Co se1"e tl#) borro$ers ("st !hoose the best !o(bi atio fro( the a'ailable so"r!es of e0ter al fi a !e to s"it the eeds of i di'id"al pro>e!ts4a d of the e!o o(# as a $hole% The !o" tr# $ishes to (i i(i?e the proble(s i ser'i!i & e$ debt) $hile (a*i & (a0i("( "se of &ra ts a d forei& loa s o !o !essio al ter(s% These are !learl# the !heapest fro( of fi a !i &) b"t their a'ailabilit# is &e erall# restri!ted to the poorest de'elopi & !o" tries: a d e'e for those !o" tries) the# are i ade1"ate to (eet eeds% A (a0i("( le'era&e !a be obtai ed fro( !o !essio al fi a !i & b# !o(bi i & it $ith other t#pes of fi a !i &% Other so"r!es of !redits are e0port fi a !i & a d loa s fro( i ter atio al !o((er!ial ba *s% A"thorities sho"ld e s"re that !redits fro( fi a !ial (ar*ets are part of a pa!*a&e that pro'ides the best possible e0ter al fi a !i & (i0 for the e!o o(#) as $ell for a i di'id"al pro>e!t% +or pro>e!ts the best (i0 !o"ld (ea o e $ith. (5) (a0i("( !o !essio al loa s or (a0i("( (ar*et fi a !e (6) the (a0i("( !apital that !a be rolled o'er easil#) or (7) the (i i("( debt ser'i!e d"e i the #ears before ret"r s (ateriali?e% A"thorities ("st also e s"re that the a&&re&ate fi a !i & pa!*a&e (eets atio al fi a !i & priorities) This i 'ol'es a assess(e t of s"!h aspe!ts as. the so"r!es of fi a !e )i !l"di & the a(o" ts that !a be borro$ed a d the prospe!ts for f"t"re s"ppl#: the !"rre !# !o(positio of forei& borro$i & that $o"ld (i i(i?e e0pos"re to e0!ha &e rate fl"!t"atio s: the e0pos"re to i terest rate fl"!t"atio s o'er the life of the loa : a d the i(pa!t of e$ borro$i & o the str"!t"re of debt ser'i!e obli&atio s%
B) ' O+
,)&' TO
- O..O+
The a(o" t that a # !o" tr# o"&ht to borro$ is &o'er ed b# t$o fa!tors. ho$ ("!h forei& !apital the e!o o(# !a absorb effi!ie tl#) a d ho$ ("!h debt it !a ser'i!e $itho"t ris*i & e0ter al pa#(e t proble(s% Ea!h fa!tor $ill depe d o the 1"alit# of
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e!o o(i! (a a&e(e t% Borro$i &s !a
be o
differe t ter(s a d i
differe t
!"rre !ies) $hi!h !o(pli!ates the poli!# de!isio % There (a# be " !ertai t# too abo"t e'ol'i & debt4ser'i!i & !apa!it#% I tera!tio bet$ee debt ser'i!i & !apa!ities) the t#pe of fi a !e) a d the borro$i & de!isio i !reases i !o(ple0it# as the "(ber of loa s i !reases%
C) , %N%GING . I*/
Co" tries are so(eti(es e0posed to BO; sho!*s arisi & fro( " fa'orable !ha &es i the relati'e pri!es of e0ports a d i(ports) s"ppose that a !o" tr#@s e0ports ear i &s are i dollars a d its forei& debts are repa#able i #e deterioratio i the e0!ha &e rate of the dollar 'is4a4'is the #e $ill add to the debt ser'i!i & obli&atio of the borro$i & !o" tr#% +l"!t"atio s i !o((odit# pri!es) forei& e0!ha &e rates a d $orld i terest rates are lar&el# be#o d the !o trol of !o" tries% It is possible to hed&e a&ai st this ris*% Ma a&i & ris* is a i(porta t part of p"bli! debt (a a&e(e t%
D) / NO+ING T 'E D E-T
I for(atio o e0ter al debt a d debt ser'i!e pa#(e ts is esse tial for the da#4to4da# (a a&e(e t of forei& e0!ha &e tra sa!tio s as $ell as (a a&i & debt a d for pla i & forei& borro$i & strate&ies) At the (ost detailed le'el) the i for(atio e ables !e tral a"thorities to e s"re that i di'id"al !reditors are paid pro(ptl#: at (ore a&&re&ated le'els: debt data are eeded for assessi & !"rre t forei& e0!ha &e eeds) pro>e!ti & f"t"re debt ser'i!e obli&atio s) e'al"ati & the !o se1"e !es of
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f"rther f"t"re borro$i & a d the (a a&e(e t of e0ter al ris* The !o(po e t of e0ter al debt statisti!s i !l"de details of ea!h loa !o tra!t a d its s!hed"le of f"t"re ser'i!e pa#(e ts) fi&"res o loa "tili?atio ) a d the pa#(e ts of debt ser'i!e forei& borro$i &) obli&atio s% +ro( these data ele(e ts s"((ar# fi&"re o i p"ts for b"d&et a d BO; pro>e!tio s% After this lets ha'e a loo* at e0ter al debt s"stai abilit# i detail i Chapter 6%
o"tsta di & debt) a d pro>e!ted debt are asse(bled% The res"lti & statisti!s pro'ide
EXTERNAL DEBT 9U9TAINABILITA

9"stai able debt is the le'el of debt $hi!h allo$s a debtor !o" tr# to (eet its !"rre t a d f"t"re debt ser'i!e obli&atio s i f"ll) $itho"t re!o"rse to f"rther debt relief or res!hed"li &) a'oidi & a!!"("latio of arrears) $hile allo$i & a a!!eptable le'el of e!o o(i! &ro$th% (UNCTAD2UND;) 5BBC)
E0ter al4debt4s"stai abilit# a al#sis is &e erall# !o d"!ted i the !o te0t of (edi"(4 ter( s!e arios% These s!e arios are "(eri!al e'al"atio s that ta*e a!!o" t of
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e0pe!tatio s of the beha'ior of e!o o(i! 'ariables a d other fa!tors to deter(i e the !o ditio s " der $hi!h debt a d other i di!ators $o"ld stabili?e at reaso able le'els) the (a>or ris*s to the e!o o(#) a d the eed a d s!ope for poli!# ad>"st(e t% I these a al#sis) (a!roe!o o(i! " !ertai ties) s"!h as the o"tloo* for the !"rre t a!!o" t) a d poli!# " !ertai ties) s"!h as for fis!al poli!#) te d to do(i ate the (edi"(4ter( o"tloo*%
,orld Ba * a d IM+ hold that < a country can be said to achieve external debt sustainability if it can meet its current and future external debt service obligations in full, ithout recourse to debt rescheduling or the accumulation of arrears and ithout compromising gro th%= A!!ordi & to these t$o i stit"tio s) e0ter al debt s"stai abilit# !a be obtai ed b# a !o" tr# <b# bri &i & the et prese t 'al"e (N;D) of e0ter al p"bli! debt do$ to abo"t 5EF per!e t of a !o" tr#@s e0ports or 6EF per!e t of a !o" tr#@s re'e "es%=
I NDI&%TO.*
OF
E 0TE.N%1 D E-T * )*T%IN%-I1IT2
There are 'ario"s i di!ators for deter(i i & a s"stai able le'el of e0ter al debt% ,hile ea!h has its o$ ad'a ta&e a d pe!"liarit# to deal $ith parti!"lar sit"atio s) there is o " a i(o"s opi io a(o &st e!o o(ists as to o e sole i di!ator% These i di!ators are pri(aril# i the at"re of ratios i%e% !o(pariso bet$ee t$o heads a d the relatio thereo a d th"s fa!ilitate the poli!# (a*ers i their e0ter al debt (a a&e(e t e0er!ise%
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These i di!ators !a be tho"&ht of as (eas"res of the !o" tr#@s <sol'e !#= i that the# !o sider the sto!* of debt at !ertai ti(e i relatio to the !o" tr#@s abilit# to &e erate reso"r!es to repa# the o"tsta di & bala !e%
E0a(ples of debt b"rde i di!ators i !l"de the (a) debt to GD; ratio) (b) forei& debt to e0ports ratio) (!) &o'er (e t debt to !"rre t fis!al re'e "e ratio et!% This set of i di!ators also !o'ers the str"!t"re of the o"tsta di & debt i !l"di & the (d) share of forei& debt) (e) short4ter( debt) a d (f) !o !essio al debt i the total debt sto!*%
A se!o d set of i di!ators fo!"ses o the short4ter( li1"idit# re1"ire(e ts of the !o" tr# $ith respe!t to its debt ser'i!e obli&atio s% These i di!ators are ot o l# "sef"l earl#4$ar i & si& s of debt ser'i!e proble(s) b"t also hi&hli&ht the i(pa!t of the i ter4te(poral trade4offs arisi & fro( past borro$i & de!isio s% The fi al i di!ators are (ore for$ard loo*i & as the# poi t o"t ho$ the debt b"rde $ill e'ol'e o'er ti(e) &i'e the !"rre t sto!* of data a d a'era&e i terest rate% The d# a(i! ratios sho$ ho$ the debt b"rde ratios $o"ld !ha &e i the abse !e of repa#(e ts or e$ disb"rse(e ts) i di!ati & the stabilit# of the debt b"rde % A e0a(ple of a d# a(i! ratio is the ratio of the a'era&e i terest rate o o"tsta di & debt to the &ro$th rate of o(i al GD;% These $ere !ertai aspe!ts of e0ter al debt i the e0t !hapter $e $ill see ho$ the e0ter al debt $as (a a&ed b# 'ario"s !o" tries of the $orld at the ti(e of e!o o(i! !risis%
DEBT MANAGEMENT 9TRATEGA4A GLOBAL ODERDIE,

The desi& of a ade1"ate strate&# for p"bli! debt (a a&e(e t sho"ld i !l"de proper !o sideratio of a "(ber of 1"estio s% A(o & the() se'eral !o(e to (i d. (a) ho$ ("!h p"bli! debt sho"ld be iss"ed i do(esti! (ar*ets a d ho$ ("!h i forei& !apital (ar*etsG (b) ,hat sho"ld be the !"rre !# de o(i atio of e$ p"bli! debt iss"esG (!) ,hat is the opti(al (at"rit# str"!t"re of p"bli! debtG (d) 9ho"ld &o'er (e ts !o sider redee(i & i ad'a !e so(e iss"es a d refi a !e the( o differe t ter(sG (e) 9ho"ld p"bli! debt be iss"ed at fi0ed or 'ariable rates a d (f) sho"ld p"bli! debt iss"es be dire!ted to a parti!"lar se&(e t of the (ar*et (fi a !ial
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i stit"tio s) other i stit"tio al i 'estors) !orporate se!tor) et!)%Most of these !hoi!es e tail a trade4off bet$ee the le'el a d the 'aria !e of debt !osts a d are hi&hl# depe de t o both the do(esti! (a!roe!o o(i! !o te0t a d !o ditio s i i ter atio al (ar*ets% No etheless) the debt (a a&e(e t strate&# has i(porta t i(pli!atio s for the e!o o(# as a $hole% Good liabilit# (a a&e(e t sho"ld res"lt i lo$er borro$i & !osts a d " obstr"!ted a!!ess to i ter atio al !apital (ar*ets) $hile (i i(i?i & a # !ro$di &4o"t effe!ts o pri'ate se!tor borro$i &% The !hoi!e of the spe!ifi! !hara!teristi!s of the debt portfolio i 'ol'es diffi!"lt de!isio s% ,hile o a p"re !ost4 based a al#sis it is te(pti & to !hoose short4ter( o'er lo &4ter( debt) the latter (i&ht Brad# bo d spreads for differe t e(er&i & (ar*et e!o o(ies ha'e beha'ed si(ilarl#) tho"&h at differe t le'els) i the (idst of fi a !ial !rises or i !reased " !ertai t#% Th"s) the li1"idit# of e(er&i & (ar*ets@ se!"rities a d the !olle!ti'e beha'ior of i stit"tio al i 'estors (a*e the fi a !ial a"thorities@ tas*s (ore diffi!"lt) parti!"larl# si !e s#ste(i! ris* (a# rise s$iftl#% O'er the past de!ade) !apital (obilit# has i !reased (a # ti(es o'er a d its (ai feat"res ha'e also !ha &ed) espe!iall# those related to the allo!atio bet$ee forei& i 'est(e t a d traditio al le di &% Me0i!o) as a re!ipie t e!o o(#) has $it essed those e'e ts% Total !apital i flo$s to Me0i!o &re$ fro( a #earl# a'era&e of U9H 6 billio i 5BIJK II to H7C billio i 5BB7% I the latter #ear) forei& i 'est(e t a(o" ted to B6F2F of !apital i flo$% The 5BB8 !risis !a"sed a i(porta t red"!tio of these flo$s) to H67 billio i 5BBE% Gi'e that forei& i 'est(e t for that #ear t"r ed o"t to be e&ati'e) loa s fro( abroad represe ted (ore tha 5FFF2F of total !apital i flo$s% +or 5BBCKBJ !apital i flo$s $ere o a'era&e H5F billio per #ear% /o$e'er) it sho"ld be e(phasi?ed that total forei& i 'est(e t represe ted (ore tha 6FFF2F of that a(o" t% That is) forei& i 'est(e t (ore tha !o(pe sated for the de!li e i i debted ess% +or 5BBIKBB !apital i flo$s are esti(ated to ha'e a'era&ed H5C billio per #ear) $ith total forei& i 'est(e t a(o" ti & to JJF2F of the i flo$s% +orei& dire!t i 'est(e t &re$ fro( H8 billio i 5BB7 to H55 billio i 5BB8 a d has *ept a stable le'el of aro" d H5F billio per #ear si !e the % O the other ha d) portfolio i 'est(e t has sho$ (ore errati! beha'ior% /a'i & rea!hed a pea* of H6B billio i 5BB7) it t"r ed e&ati'e i
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5BBE (KH5F billio ) a d for 5BBCKBB has a'era&ed " der H5 billio per #ear% The i(porta t red"!tio i the flo$s of forei& portfolio i 'est(e t to Me0i!o si !e the !risis of 5BB8KBE is pri(aril# e0plai ed b# the adoptio of a floati & e0!ha &e rate re&i(e% This re&i(e has pro'ed to be e0tre(el# helpf"l i i hibiti & short4ter( forei&
i 'est(e ts b# red"!i & their e0pe!ted ret"r ) o !e ad>"st(e t is (ade for e0!ha &e rate ris*% ,itho"t the i(pli!it &"ara tee to portfolio i 'est(e t pro'ided b# the se(i4 fi0ed e0!ha &e rate re&i(e) forei& dire!t i 'est(e t started to pla# a (ore do(i a t role i fi a !i & Me0i!o@s !"rre t a!!o" t defi!it bl"rred% The E0!ha &e 9tabili?atio +" d pre'e ted the li1"idit# !risis fro( t"r i & i to a sol'e !# !risis) $hose reper!"ssio s $o"ld ha'e bee far (ore de'astati &% ;rior to 5BB8) both debtors a d the ba *i & s#ste( i &e eral $ere i a fra&ile sit"atio % ;ast d"e loa s had i !reased s"bsta tiall#) a d the la!* of proper pro'isio i & started to erode ba *s@ !apital% I additio ) so(e !o((er!ial ba *s fa!ed se'ere proble(s that $ere ot re'ealed i their fi a !ial state(e ts) a d) i so(e i sta !es) ba *s disre&arded e0isti & re&"latio s a d proper ba *i & pra!ti!es (Ma !era (5BBJ))% I this e 'iro (e t) the effe!t of the !"rre !# depre!iatio ) risi & i flatio a d hi&her i terest rates o the !redit ser'i!e b"rde serio"sl# >eopardi?ed the Me0i!a fi a !ial s#ste(% At that ti(e) the (ateriali?atio of s#ste(i! ris* a d its i(pa!t o the e!o o(# $ere (a>or !o !er s% +a!ed $ith this sit"atio ) the &o'er (e t a d the !e tral ba * i(ple(e ted a !o(prehe si'e pro&ra((e to deal $ith the ba *i & se!tor !risis) $itho"t deraili & (o etar# poli!# fro( its (ai tas* of pro!"ri & the red"!tio of i flatio % The s"!!essf"l (i0 of poli!ies e s"red the !o siste !# of Me0i!o@s (a!roe!o o(i! fra(e$or* a d allo$ed the e!o o(# to re!o'er a d rapidl# ret"r to i ter atio al (ar*ets% A i(porta t ele(e t of the o'erall strate&# $as to pro'ide li1"idit# to !o((er!ial ba *s to !o(pl# $ith their e0ter al obli&atio s% To this e d) a dollar fa!ilit# $as (ade a'ailable to the( b# the !e tral ba *% Th"s) Ba !o de ML0i!o pla#ed the role of le der of last resort for !o((er!ial ba *s at a ti(e of distress)
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(a*i & forei& ;rote!tio
e0!ha &e a'ailable to ba *s thro"&h a spe!iall# desi& ed !redit
$i do$% These dollar4de o(i ated loa s $ere !ha eled thro"&h the +" d for the of 9a'i &s (+OBA;ROA)%At the be&i i & of April 5BBE) the dollar4 de o(i ated !redits &ra ted thro"&h +OBA;ROA rea!hed a (a0i("( of U9H 7%I billio % /o$e'er) the hi&h le'el of i terest rates p"rposel# !har&ed o s"!h !redits i d"!ed a rapid a(orti?atio ) as ba *s so"&ht other so"r!es of fi a !i &% B# C 9epte(ber 5BBE) the 5J !o((er!ial ba *s that had parti!ipated i this s!he(e had alread# repaid their !redits% I this se se) the pro&ra((e a!hie'ed its stated p"rpose) a(el# that of pro'idi & te(porar# assista !e% O !e i ter atio al (ar*ets $ere reope ed to Me0i!a a&e ts (M"l# 5BBE)) the (ai ob>e!ti'es for the i((ediate f"t"re i !l"ded the refi a !i & of the E0!ha &e 9tabili?atio +" d i the (ar*et) ha'e a s(aller ref" di & ris* a d th"s be preferable i the e d% That is) a better s!hed"le of a(orti?atio s lo$ers !o" tr# ris* a d fi a !e !osts o'er the (edi"( ter() both for the &o'er (e t a d for the pri'ate se!tor% Li*e$ise) borro$i & do(esti!all# (a# t"r o"t to be (ore e0pe si'e tha i e0ter al (ar*ets% Aet borro$i & i do(esti! (ar*ets !o"ld tri&&er a rapid de'elop(e t of these (ar*ets a d pa'e the $a# for a solid !orporate do(esti! (ar*et i the f"t"re% I s"() a &ood liabilit# (a a&e(e t strate&# is o e that helps (i i(i?e the !ost of borro$i & o'er the (edi"( a d lo & ter(% The ob>e!ti'e is !ertai l# ot to sa'e the last basis poi t i ea!h tra sa!tio ) b"t rather to bri & do$ the o'erall borro$i & !ost% Th"s) a s(ooth debt a(orti?atio e'e profile is !r"!ial% There is o do"bt that e(er&i & e!o o(ies ha'e to $or* hard to e s"re desirable !hara!teristi!s i the debt profile) if i itiall# !ostl#% At the e d of 5BB8) Me0i!o fa!ed a li1"idit# !risis a!!o(pa ied b# a 'er# hi&h refi a !i & ris*% This for!ed the !o" tr# to see* s"pport fro( the i ter atio al !o((" it# to !o fro t the hea'# short4ter( debt b"rde % E!o o(i! poli!# $as orie ted to$ards rapidl# re4 establishi & (a!roe!o o(i! stabilit#% This $as the o l# $a# to stop !apital fli&ht a d &rad"all# restore Me0i!o@s a!!ess to i ter atio al fi a !ial (ar*ets% To deal $ith the s!e ario >"st des!ribed) a !o(prehe si'e pa!*a&e of poli!# (eas"res $as p"t to&ether% The stabili?atio pro&ra((e $as b"ilt "po restri!ti'e fis!al a d (o etar# poli!ies a d $as rei for!ed b# the fi a !ial pa!*a&e (E0!ha &e 9tabili?atio +" d)
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asse(bled b# the U9 fi a !ial a"thorities a d ("ltilateral or&a i?atio s% The res!"e pa!*a&e a(o" ted to (ore tha U9H E6 billio . H5J%I billio !o((itted b# the IM+) H6F billio b# the U ited 9tates &o'er (e t) H5F billio b# the Ba * for I ter atio al 9ettle(e ts) H7 billio b# !o((er!ial ba *s a d H5%E billio b# the Ba * of Ca ada% It is $orth (e tio i &) ho$e'er) that i 5BBE Me0i!o@s dra$i &s a(o" ted to o l# H68%B billio % A sol'e t &o'er (e t (i&ht still fa!e li1"idit# proble(s that li(it its abilit# to ser'i!e its debt% +or i sta !e) a o'erl# pessi(isti! 'ie$ abo"t the f"t"re of the e!o o(# (i&ht lead le ders to !"rtail the a(o" t of fi a !i & te(poraril# e'e if the !o" tr# is i fa!t sol'e t% E'e t"all#) li1"idit# proble(s (i&ht es!alate) e&ati'el# affe!ti & the &o'er (e t@s a!!ess to i ter atio al !apital (ar*ets% At this parti!"lar sta&e) the disti !tio bet$ee li1"idit# a d sol'e !# proble(s for a !o" tr# is% At the sa(e ti(e: the pri'ate pe sio f" d s#ste( has !o ti "ed to &ro$) (a*i & lo &4ter( reso"r!es (ore $idel# a'ailable% Toda#) Me0i!o@s forei& debt a(orti?atio s!hed"le is li&ht a d $ell distrib"ted o'er ti(e% The o'erall debt b"rde ) i !l"di & do(esti! a d e0ter al debt) di(i ished fro( le'els abo'e 8EF2F of GD; i 5BBF to appro0i(atel# 6IF2F i 5BBI% This tre d is tho"&ht to ha'e !o ti "ed i 5BBB%The !o" tr#@s sol'e !# a d li1"idit# i di!ators !o(pare fa'orabl# to those of other !o" tries. e0ter al debt as a share of GD; a(o" ted to 5JF2F i earl# 5BBB) $hile the ratio of total e0ports to e0ter al debt $as 5%J% A e0a(ple of Me0i!o@s strate&# to e s"re e0ter al fi a !i & $he !o ditio s i i ter atio al !apital (ar*ets t"r ad'erse is the !redit li e se!"red $ith i ter atio al fi a !ial i stit"tio s i No'e(ber 5BBJ% After ha'i & a loo* at the &lobal s!e ario of e0ter al debt lets " dersta d the debt (a a&e(e t i I dia %
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E"TE#$%& DEBT DE'E&(PME$T %$D M%$%)EME$T

9OME RE+LECTION9 ON INDIA IN!RO"#C!ION
I 5BBF4B5 $he I dia &ot i to a se'ere forei& e0!ha &e !risis her o"tsta di & le'el of e0ter al debt $as H I7% I billio % The le'el of debt $as abo"t 8F per !e t of Gross Do(esti! ;rod"!t a d the debt ser'i!e pa#(e t $as abo"t 7F per !e t of e0ports of &oods a d ser'i!es% 9e'eral destabili?i & for!es a!ti & o the I dia forei& e0!ha &e (ar*ets $ere a do$ &rade of I dia@s so'erei& !redit rati &s to o 4i 'est(e t &rade) re'ersal of !apital flo$s) e0a!erbated the forei& e0!ha &e !risis a d
$ithdra$al of the forei& !"rre !# deposits held b# o 4reside t I dia s% O e !a best des!ribe the se'erit# of the sit"atio b# 1"oti & fro( the the +i a !e Mi ister of I dia Dr Ma (oha 9i &h@s B"d&et 5BB64B7 spee!h to the ;arlia(e t.
$%hen the ne &overnment assumed office '(une )**)+ e inherited an economy on the verge of collapse, Inflation as accelerating rapidly, !he balance of payments ere barely enough for t o as in serious trouble, !he foreign exchange reserves
ee-s of imports, .oreign commercial ban-s had stopped lending to India, Non/ resident Indians ere ithdra ing their deposits, 0hortages of foreign exchange had forced a massive import s1uee2e, hich had halted the rapid industrial gro th of earlier years and had produced negative gro th rates from 3ay )**) on ards$,
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,ith this ba!*&ro" d a st"d# o I dia@s e0ter al debt $o"ld ob'io"sl# raise !ertai 1"estio s s"!h as. ho$ did I dia (a a&e histori!all# $ith a 'er# lo$ 'ol"(e of e0ter al !apital i flo$s: ho$ is that the third $orld debt !risis of earl# IFs had a little i(pa!t: ho$ is it the that I dia &ot i to a (assi'e forei& e0!ha &e !risis i 5BBF4 B5: ho$ $as I dia spared fro( the !o ta&io"s !"rre !# !risis of 5BBJ: a d ho$ did I dia (a a&ed to i(pro'e her ra * fro( $hat $as third debtor after Bra?il a d Me0i!o i 5BB5 to eighth i 6FF6 i the list of the top fiftee debtor !o" tries(as per the Global De'elop(e t +i a !e report 6FF8 p"blished b# the ,orld Ba *)% 9till (ore otable is the fa!t that I dia e'er defa"lted to i ter atio al le ders i her e tire !redit histor# (e0!ept o e or t$o i sta !es of !orporate res!hed"li &)%
Altho"&h the le'el of debt has i !reased to H 556%5 billio b# e d4De!e(ber 6FF7) the (a& it"de of debt is o lo &er a iss"e at prese t% The e!o o(i! refor(s a d debt (a a&e(e t poli!ies p"rs"ed si !e 5BB5 ha'e helped to bri & do$ the share of e0ter al debt i GD; to 6F%6 per !e t a d the debt ser'i!e ratio to 5E%I per!e t b# e d4De!e(ber 6FF7% The refor(s i 'ol'i & trade a d !apital a!!o" t liberali?atio ha'e !ha &ed the at"re a d !o(positio of !apital flo$s i to I dia e!o o(#% The &rad"al ope i & of the !apital a!!o" t a d i(pro'ed !redit sta di & i ter atio all#) s"pported b# the pr"de t (a!roe!o o(i! poli!ies) ha'e established i 'estors@ !o fide !e%
The abo'e s!e ario altho"&h pres"pposes se'eral a!!o(plish(e ts " derl#i & the !o" tr#@s e0ter al debt (a a&e(e t histor#) the I dia displa#ed se'eral episodes of i(bala !es i e!o o(# e'ertheless her debt) !apital flo$s a d e0ter al
se!tor% I dia@s e0ter al debt (a a&e(e t i the li&ht of the de'elop(e t i her o'erall (a!roe!o o(i! poli!ies a d dra$s lesso s for !o" tries i the re&io % It eeds to be (e tio ed here that the tre ds i debt eed to be re'ie$ed alo & $ith the de'elop(e ts i e0ter al se!tor a d !apital flo$s) be!a"se the o'erall trade re&i(e) i 'ol'i & trade restri!tio s) e0port s"bsidisatio a d e0!ha &e !o trols $o"ld &o'er to a lar&e e0te t the beha'io"r of e0ter al debt%
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B URDEN O+ E XTERNAL D EBT I N I NDIA

It is a so"r!e of so(e !o(fort that I diaNs e0ter al debt !o ti "es to be at a stable le'el% A!!ordi & to the stat"s paper prepared b# the U io +i a !e Mi istr#) the sto!* of forei& debt stood at HBI%8 billio at the e d of De!e(ber 6FF5% After a s"bsta tial i !rease of H5C billio bet$ee 5BB5 a d 5BBE) partl# o a!!o" t of fresh loa s a d partl# o a!!o" t of e0!ha &e rate (o'e(e ts) the total debt has fl"!t"ated bet$ee HB7 billio a d HBB billio si !e 5BBE% Goi & b# a "(ber of i di!ators) I diaNs e0ter al debt sit"atio is far better toda# tha it $as d"ri & the bala !e of pa#(e ts (Bop) !risis of 5BB5% ,hile the absol"te si?e of forei& debt is i(porta t) (ore rele'a t is the $ei&ht this debt i(poses o the e!o o(#% A d) o that !o" t) the b"rde has be!o(e li&hter a d li&hter) e'e as the sto!* of o"tsta di & has re(ai ed (ore or less !o sta t% A "al repa#(e ts of loa s a d i terest as a per!e ta&e of !"rre t re!eipts O the debt ser'i!e ratio) $hi!h $as as hi&h as 7E per !e t i 5BBF4B5) has falle to 57 per !e t toda#% Debt as a per!e ta&e of the &ross do(esti! prod"!t has earl# hal'ed si !e the earl# 5BBFs% A d the short4ter( debt to GD; ratio) $hi!h !rossed 5F per !e t i 5BBF4B5 a d pre!ipitated the Bop !risis of that #ear) has bee held " der 7 per !e t% O'erall) I dia is o$ !lassified b# the ,orld Ba * as a -less- i debted !o" tr#) $hi!h is t$o r" &s belo$ the e0tre(e !ate&or# of -se'erel#- i debted !o" tries) $hi!h is $here Bra?il) Ar&e ti a a d I do esia o$ belo &% I absol"te ter(s as $ell) I diaNs positio has i(pro'ed &loball#% I the (id45BBFs) I dia $as the third lar&est debtor i the $orld: toda# it is ra *ed i th% All this has ta*e pla!e i spite of the fa!t that e$ loa s are i !reasi &l# bei & raised o !o((er!ial rather tha !o !essio al ter(s) as $as the pra!ti!e for de!ades%
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E XTERNAL D EBT M ANAGEMENT ; OLICA

I dia@s Debt4GD; ratio $hi!h sho$s the (a& it"de of e0ter al debt to do(esti! o"tp"t had de!li ed fro( 7I%J P at the e d of Mar!h 5BB6 to 66%7P at e d Mar!h 6FF5%9i(ilarl# the debt ser'i!e ratio that (eas"res the abilit# to ser'e debt obli&atio s has de!li ed fro( 7E%7P of !"rre t re!eipts i 5BBF4B5 to 5C%7P i 6FFF4 F5% This i(pro'e(e t i e0ter al debt sho"ld be attrib"ted both to a !a"tio"s poli!# o forei& borro$i &s ($hi!h i !l"des a "al !aps o !o((er!ial loa s $hi!h $o"ld ot ha'e bee possible if the r"pee $as f"ll# !o 'ertible) a d to the stead# &ro$th i !"rre t re!eipts i the Bop% There are) ho$e'er) e o"&h areas of !o !er ) $hi!h sho"ld pre'e t !o(pla!e !# a d pers"ade the Go'er (e t to &o slo$ o !apital a!!o" t !o 'ertibilit#% The first is that $hile the short4ter( debt to GD; ratio $as o l# 6%I per !e t at the e d of 6FF5) the (ore a!!"rate (eas"re of i((ediate repa#(e tsO total debt of a resid"al (at"rit# of o e #ear O $as B per !e t of GD; i De!e(ber 6FF5% This is still ot a 'er# hea'# b"rde ) b"t it is ot so(ethi & to be ta*e li&htl#% The se!o d !o !er sho"ld be that the esti(ate of debt ser'i!i & i the #ears ahead (based o past borro$i &s) sho$s that there are &oi & to be t$o (a>or h"(ps ro" d the !or er% I 6FF74F8 a d 6FFE4FC) repa#(e ts of the e0pe si'e Res"r&e t I dia Bo ds a d I dia Mille i"( Deposits fall d"e% Debt ser'i!e i both #ears $ill the !ross H56 billio % This $ill be the lar&est si !e 5BBE4BC) tho"&h the Go'er (e t hopes that ot all the repa#(e ts $ill be repatriated% The third !o !er sho"ld be the i(pa!t of the Go'er (e tNs de!isio to (a*e e'e the e0isti & o 4repatriable ba * deposits b# o 4reside t I dia s f"ll# pa#able i forei& e0!ha &e% As a !o se1"e !e) t$o s"!h s!he(es $ere dis!o ti "ed last April a d o"tsta di &s tra sferred to
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repatriable a!!o" ts $here the# $ill be held till (at"rit#% The sto!* of deposits i o e of these s!he(es $as itself o'er HJ billio % This (ea s that if these deposits are ta*e o"t of the !o" tr# $he the# (at"re the# $ill add to I diaNs debt ser'i!e b"rde % A d if the# are re e$ed the# $ill add s"bsta tiall# to I diaNs e0ter al debt b"rde % Either $a#) the Go'er (e tNs de!isio is &oi & to ha'e a e&ati'e i(pa!t o the Bop%
;ROBLEM9 O+ EXTERNAL DEBT MANAGEMENT IN INDIA

Borro$i & !osts are ot li(ited to i terest !osts% +irst) there is the depe de !#
s# dro(e) $hi!h leads to the de'elop(e t of !o stit"e !ies at the 'ario"s le'els of &o'er (e t to *eep the borro$i & (o(e t"( i f"ll s$i &) a!ti'el# s"pported b# the ("ltilateral de'elop(e t a&e !ies% 9e!o d) there is a i !reasi & i the e'e t of a # de(o stratio of ele(e t of " !ertai t# i area re&ard to $hether the loa s $ill be a'ailable $he (ost eeded) $ith the " !ertai t# atio al self4relia !e i " a!!eptable to the sto!*holders of the le di & a&e !ies% Third) either the !i'il ser'a ts e&otiati & the loa s or their politi!al bosses ha'e a dire!t respo sibilit# for loa repa#(e t) $ith the res"lt that there is bo" d to be a relati'el# hi&h de&ree of la0it# i e s"ri & the best a d (ost prod"!ti'e "se of the borro$ed f" ds% +o"rth) there is hardl# a # e'ide !e to i di!ate that !o" tries $ith hea'# i debted ess reall# !a e'er de'elop to s"!h a e0te t that the# $ill be free fro( s"!h i debted ess% E 0TE.N%1 D E-T D E3E1O4,ENT ) NTI1 56789 * Loo*i & at histori!all# o e obser'es that e0ter al !apital pla#ed a 'er# i si& ifi!a t role i I dia@s de'elop(e t pro!ess% The i d"strialisatio strate&# adopted si !e the 5BEFs e("lated a i(port s"bstit"ti & trade re&i(e) $ith both i(ports a d e0ports bei & stri!tl# re&"lated thro"&h 1"ota a d d"ties% The le'el of !"rre t a!!o" t defi!it $as as lo$ as 5%6 per !e t i 5BJF) (at!hi & the a'ailabilit# of e0ter al fi a !e) (ost of $hi!h $ere !o tra!ted fro( the offi!ial !reditors a d at !o !essio al i terest rates% ;ri'ate !o((er!ial borro$i &s fro( the i ter atio al !apital (ar*ets $ere il% The total e0ter al debt o"tsta di & at H I%8 billio $as >"st abo"t 57%7 per !e t of GD; for the #ear 5BJF%
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I dia respo ded 'er# $ell to the first oil sho!* of 5BJ7) $ith pr"de t (a!roe!o o(i! (a a&e(e t% The deflatio ar# sta !e of (a!roe!o o(i! poli!ies !o"pled $ith (assi'e i flo$s of i $ard re(itta !es fro( G"lf led to e'e a s"rpl"s o !"rre t a!!o" t i 5BJC4JJ) $hi!h helped to b"ild "p the reser'e le'el% I(ports $ere 'irt"all# restri!ted to the le'el of e0ports) a d th"s the e tire i flo$s of $or*erNs re(itta !es a d et aid i flo$s (after ad>"sti & the &ross flo$s for debt ser'i!e) $ere plo"&hed ba!* to b"ild "p the reser'es%
It $as o s"rprise) therefore) to fi d that d"ri & this period &ross aid i flo$s $ere sharpl# red"!ed b# the do ors) as these $ere o l# &oi & to s$ell f"rther the reser'es% B# 5BJI4JB) the reser'e le'el rea!hed abo"t B (o ths of i(port re1"ire(e ts% There $as stro & opi io i so(e 1"arters as to $hether I dia !o"ld ta*e ad'a ta&e of this !o(fortable forei& e0!ha &e sit"atio to rela0 the se'erit# of the i(port !o trol re&i(e% To so(e e0te t i(ports $ere liberalised i 5BJC4JJ a d 5BJJ4JI thro"&h the i trod"!tio of Ope Ge eral Li!e se (OGL)) b"t the persiste !e of al(ost total prote!tio i(port% of the I dia i d"strial se!tor pre'e ted a # si& ifi!a t loose i & of
The se!o d oil sho!* had a (a>or i(pa!t o I dia@s bala !e of pa#(e ts) ho$e'er) $ith the pri!es of ;OL (ore tha do"bli & d"ri & the !o"rse of 5BJB% The oil i(ports a!!o" ted for al(ost EI per!e t of total i(ports a d 8C per!e t i ter(s of e0port ear i &s% The pri(ar# fo!"s of bala !e of pa#(e t (a a&e(e t after the se!o d sho!* $as to fi a !e the defi!it) rather to !o trol it thro"&h deflatio ar# sta !e of the first oil sho!*4t#pe%
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D E3E1O4,ENT*
IN
E 0TE.N%1 * E&TO. D ).ING 56:89 *
I dia re(ai ed " affe!ted b# the debt !risis of earl# ei&hties fa!i & (a # de'elopi & !o" tries) d"e to her i si& ifi!a t le'el of pri'ate debt% The forei& !o strai ts i e0!ha &e the after(ath of se!o d oil sho!* !o"ld be relie'ed b# dra$i &
s"bsta tial a(o" t of loa s fro( the I ter atio al Mo etar# +" d. 9DR 6CC (illio " der Co(pe sator# +i a !i & +a!ilit# (C++) i 5BIF) 9DR E6B%F5 (illio " der Tr"st +" d Loa (T+L) i 5BIF4I5 a d 9DR E billio " der E0te ded +" d +a!ilit# (E++) d"ri & 5BI54I8 (of $hi!h I dia "sed o l# 9DR 7%B billio )% The forei& e0!ha &e sit"atio also i(pro'ed dra(ati!all# d"e to the i flo$ of re(itta !es fro( the G"lf%
A s"bsta tial a(o" t of i(port sa'i &s !o"ld be (ade d"e to lar&e4s!ale i(port s"bstit"tio i the areas of food) petrole"( (after the dis!o'er# of Bo(ba# /i&h) a d fertili?er% Th"s) a i(pro'ed forei& e0!ha &e s!e ario) $hi!h alo & $ith the her !redit4 a'ailable ("ltilateral !o !essio al assista !e helped I dia to retai
$orthi ess a d a'oid a possible li1"idit# !risis of the Lati A(eri!a t#pe i earl# 5BIFs% I fa!t ta*i & the ad'a ta&e of the i(pro'ed forei& e0!ha &e s!e ario I dia poli!# (a*ers atte(pted to rela0 the se'erit# of the !o trolled trade re&i(e i the IFs% The liberali?atio of the i(port !o trol re&i(e) parti!"larl# the !ate&or# of Ope Ge eral Li!e se (OGL) a d e0port4related li!e ses) ope ed "p a 'ariet# of i(ports that $ere re1"ired b# a $ider ra &e of e(er&i & !o s"(er &oods i d"stries% E0port &ro$th re(ai ed sl"&&ish d"ri & the ei&hties) d"e to the slo$do$ i the &ro$th of $orld trade) de!li e i pri(ar# !o((odit# pri!es i the &lobal (ar*et) a d the e0pa sio ar# poli!# at ho(e) as the later (i&ht ha'e red"!ed the e0portable s"rpl"s to so(e e0te t% I deed the trade defi!its $e t "p fro( H E%B billio i 5BI84IE to H J%B billio i 5BBF4B5 ($ith H B%5 billio i 5BII4IB) a d the !"rre t a!!o" t defi!its fro( H 6%8 billio to H I%B billio d"ri & the sa(e period (based o RBI data)%
,ith the ear stabilit# i the i flo$s of !o !essio al assista !e) fi a !i & of defi!its $ere (ade b# raisi & !o((er!ial loa s fro( the e"ro!"rre !# (ar*ets i the for( of
Page 3 2!
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s# di!ated loa s a d e"robo ds as $ell as a!!epti & short ter( forei& !"rre !# deposits fro( the o 4reside t I dia s%
Table 1* +ndi,ator- of ./rrent %,,o/nt S/-tainabilit0 for +ndia (;er !e t)
I di!ator Trade Defi!it2 GD; C"rre t A!!o" t Defi!it2GD; Gross +is!al Defi!it2GD; ;ri'ate 9e!tor. 9I Gap E0ter al Debt2GD; 9hort4ter( Debt2Total Debt No 4Debt Capital +lo$s2Total Capital
5BJ54
5BJC4
5BI54
5BIC4
5BB54
5BBC4 6FF546FF7 46%6 F%6 4E%B B%B 65%6 7%C B8%I
5BJE 5BIF 5BIE 5BBF 5BBE 6FFF 4F%B 45%8 46%E 46%5 45%6 46%E 4F%8 F%6 45%E 46%6 45%7 45%7 47%7 4E%F 4C%I 4I%5 4E%J 4E%5 6%J 8%J 7%I 8%I J%7 C%C 5E%7Q 56%IQ 57%6Q 5E%IQ 77%B 68%7 %% %% %% 5F%F C%J E%7 %% %% %% C%F 6J%5 8B%7
+lo$s Debt 9er'i!i & %% %% %% 7F%6 6I%B 5B%J 5E%7 Cha &es i REER %% 46%5 F%I 48%B 46%B 4F%I 8%I I(port Co'er (Mo ths) 8%7 J%8 8%6 7%7 E%B J%6 55%6 Q Co(prisi & of e0ter al assista !e) !o((er!ial borro$i &s a d IM+ loa s o l#% Th"s) the e0ter al debt4GD; ratio for these periods is ot !o(parable $ith the s"bse1"e t period% 9I Gap. 9a'i & I 'est(e t Gap So/r,e* Reser'e Ba * of I dia%
The i(bala !es i the e0ter al se!tor !oi !ided $ith the (a!roe!o o(i! i(bala !es i the e!o o(#) parti!"larl# i the for( of i !reasi & do(esti! (o e# s"ppl# a d b"d&et defi!its (see Table 5)% The e0pa sio ar# (o etar# a d fis!al poli!ies did ot ta*e i to a!!o" t the li*el# reper!"ssio i the for( of spill o'er effe!ts o bala !e of pa#(e ts% I fa!t) the &e eratio of the e0!ess li1"idit# that a!!o(pa ied the liberalised i(port str"!t"re s$elled the le'el of !"rre t a!!o" t defi!it%
The pri !ipal (ode of bala !e of pa#(e t ad>"st(e ts i I dia d"ri & the se!o d half of the ei&hties $as the (a a&ed depre!iatio of the r"pee% Bet$ee 5BIE4BF) the NEER of the r"pee depre!iated b# al(ost EF per !e t a d the REER b# 7F per !e t% It is !lear that i a sit"atio $here the bala !e of pa#(e t proble( $as basi!all# d"e to the (a!roe!o o(i! i(bala !es) $hi!h arose pri(aril# fro( the e0pa sio ar# (a!roe!o o(i! poli!ies a d the liberalised i(port str"!t"re) the e0pe dit"re s$it!hi & effe!ts of de'al"atio did ot $or*%
Page 3 21
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The debt (a a&e(e t poli!ies i 5BJF@s a d 5BIF@s $as ot helpi & I dia de'elop a d there arised a eed to (a*e !ha &es i the poli!ies%
.#+S+S %$D # E1(#M +$ T2E 1
!S
The forei& e0!ha &e !risis ope ed "p se'eral i ter al !o fli!ts of a i $ard loo*i & e!o o(#% The poli!# (a*ers !o sidered the " s"stai able bala !e of pa#(e t sit"atio as the s#(pto( a d the disease $as i here t i the trade a d i d"strial poli!# that prote!ted the I dia e!o o(# fro( both i ter al a d e0ter al !o(petitio % The shri *i & share of I diaNs e0ports i the &lobal trade $as !o sidered as the refle!tio of the re!edi & e0ports !o(petiti'e ess a d the abse !e of a ri&ht *i d of
Page 3 22
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!o((odit# (i0 i I diaNs e0port bas*et% The i effi!ie !# of the trade re&i(e had ("!h to do $ith the prohibiti'e tariffs a d a per'asi'e s#ste( of i(port !o trols% The e tire re&i(e of dis!retio ar# (a a&e(e t of forei& e0!ha &e had !o strai ed &ro$th) proliferated bla!* (ar*ets i !o siderable re t4see*i & a!ti'ities% forei& e0!ha &e a d !reated a'e "es for
I dia@s approa!h to the 5BBF4B5 !rises $as ot to defa"lt o her e0ter al obli&atio s) rather to p"rs"e (a!roe!o o(i! refor(s) a d re(ai !"rre t o debt ser'i!i & b# borro$i & fro( ("ltilateral so"r!es% As part of the o'erall (a!roe!o o(i! refor(s) s$eepi & !ha &es $ere i trod"!ed i the areas of trade a d e0!ha &e rate poli!ies%
The Co &ress led &o'er (e t) $hi!h ass"(ed offi!e at the Ce tre i M" e 5BB5) a!!epted the (edi"( ter( str"!t"ral ad>"st(e t pro&ra((e of the IM+% 5BB5 the r"pee $as de'al"ed at t$o sta&es) fro( R 5 Rs%78%7C to Rs%85%EB% This $as follo$ed b# a plethora of trade poli!# refor( (eas"res) be&i i & A"&"st 5BB5) b# slashi & !ash s"bsidies for the e0port se!tor a d relie'i & the e!o o(# fro( the SR a d tariff re&i(es adopted si !e fifties% A i((ediate fall o"t of this pro&ra((e $as the sharp de'al"atio of the r"pee% I M"l#
I dia@s refor( efforts si !e 5BBFs had led to a res"(ptio of &ro$th) de!li e i i flatio ) i(pro'ed fis!al defi!it) a d a s"stai able bala !e of pa#(e ts% As $e shall see later this had re(ar*abl# red"!ed the e0ter al debt b"rde a d bro"&ht se'eral be efi!ial !ha &es i the !o(positio of !apital flo$s i #ears to !o(e% D E3E1O4,ENT*
TO
5665 F O.EIGN E 0&'%NGE & .I*I*
B# 5BBF) there $as a (ar*ed deterioratio i I diaNs bala !e of pa#(e ts% Altho"&h there $as satisfa!tor# &ro$th i e0ports) it $as o'ershado$ed b# &ro$th i i(ports) sta& a t flo$s i i 'isibles s"!h as to"ris( a d pri'ate tra sfers) a d (o" ti & debt ser'i!e b"rde % The !"rre t a!!o" t defi!its $hi!h $ere s"stai ed (ai l# b# borro$i & fro( !o((er!ial so"r!es a d NRI deposits) $ith short (at"rities a d 'ariable i terest rates) res"lted i a balloo i & of repa#(e t b"rde to$ards 5BBF% The si?e of e0ter al debt rea!hed H I7 billio i Mar!h 5BB5) 8E per!e t of $hi!h $as !o tra!ted fro( pri'ate !reditors a d at 'ariable i terest rates%
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The debt ser'i!e pa#(e ts had rea!hed 7F per!e t of e0port ear i &s b# Mar!h 5BB5) $hi!h $as !lose to so(e of the hea'il# i debted !o" tries s"!h as I do esia (75 per !e t)) Me0i!o (6I per !e t)) a d T"r*e# (6I per !e t)%
I terest !o(po e ts alo e $ere abo"t H 8 billio ) !o(prisi & so(e EF per !e t of the total !"rre t a!!o" t defi!its a d 65 per !e t of the total (er!ha dise e0ports% The &ro$th of e0ports i U9 dollar ter(s $as ot s"ffi!ie t e'e to pa# for the i terests for ea!h of the three #ears to 5BBF4B5 a d I dia had to (a*e for a(orti?atio pa#(e ts b# resorti & to fresh borro$i &%
The forei& e0!ha &e !risis $as e0a!erbated b# the G"lf $ar that be&a i A"&"st 5BBF) !a"si & shortfall i e0ports to ,est Asia) loss of re(itta !es fro( T"$ait a d Ira1) h"&e forei& e0!ha &e !osts of e(er&e !# repatriatio fro( the re&io a d) (ost i(porta tl#) additio al !ost of oil i(ports d"e to the oil pri!e i !rease% The G"lf !risis !oi !ided $ith re!essio ar# tre ds i the ,est that had depressed the de(a d for I dia@s e0ports%
+"rther(ore) the e!o o(i! de!li e i Easter E"rope led to a !o tra!tio of e0ports to these (ar*ets%
The " !ertai politi!al !li(ate at ho(e alo & $ith the pre!ario"s bala !e of pa#(e ts sit"atio led to the erosio of I diaNs !redit rati &s abroad% The Mood#Ns do$ &raded I diaNs stat"s to BB i 5BBF) $hi!h $as the hi&hest spe!"lati'e &rade for lo &4ter( debt%
There $ere i di!atio s that the et reso"r!e tra sfer o a!!o" t of offi!ial a d pri'ate !redit had be!o(e e&ati'e i 5BBF4B5 i%e% the fresh i flo$s $ere ot e'e ade1"ate to (eet the obli&atio s o a!!o" t of a(orti?atio a d i terest pa#(e ts% The le'el of forei& e0!ha &e reser'es fell to >"st H 5 billio i 5BBF4B5% This desperate sit"atio led the Reser'e Ba * of I dia to sell 6F to pled&e a other 8C%B5 to es of &old i Ma# 5BB5 a d
es i M"l# 5BB5) for (eeti & the "r&e t forei& e0!ha &e
Page 3 24
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eeds a d fi a !i & !"rre t a!!o" t defi!its% A i((i e t forei& e0!ha &e !risis loo(ed lar&e before the I dia e!o o(#) $ith " s"stai able e0ter al debt b"rde %
. E*4ON*E
TO
5665
&.I*I* %ND IT* EFFE&T*
Te #ears a&o I dia $as i the (idst of a f"ll4blo$ bala !e of pa#(e ts !risis% ,e ha'e !o(e a lo & $a# si !e those dar* da#s of !ollapsi & !o fide !e) tha *s (ai l# to so" d e!o o(i! poli!# a d partl# to &ood l"!*% It@s a stor# of s"!!essf"l e!o o(i! refor(% To be&i $ith) it@s $orth re!alli & >"st ho$ bad o"r e0ter al e!o o(i! positio had had be!o(e i 5BB5% B# Mar!h the !"rre t a!!o" t defi!it i the Bo; had !"("lated to a re!ord le'el of earl# 5F billio dollars or o'er 7 per !e t of GD;% E0ports $ere falli &% The forei& borro$i & spree had ta*e the ratio of short4ter( e0ter al debt to forei& !"rre !# reser'es to a astro o(i!al 7IF per !e t% +orei& !"rre !# reser'es s*ated !lose to a pitif"l billio dollars thro"&ho"t the spri & a d s"((er of the #ear%
Page 3 25
TYBMS
NRI deposits $ere bleedi & a$a#% A!!ess to !o((er!ial e0ter al !redit $as be!o(i & e0tre(el# !ostl# a d diffi!"lt% E'e the or(all# sober &o'er (e t E!o o(i! 9"r'e# for the #ear ad(itted <A defa"lt o pa#(e ts) for the first ti(e i o"t histor# had be!o(e a serio"s possibilit# i M" e 5BB5=% +a!ed $ith this prospe!t) the e$ Go'er (e t ($ith Ma (oha 9i &h as fi a !e (i ister) " dertoo* e(er&e !# (eas"res to restore e0ter al a d do(esti! !o fide !e i the e!o o(# a d its (a a&e(e t% The r"pee $as de'al"ed) the fis!al defi!it $as !"t a d spe!ial bala !e of pa#(e ts fi a !i & (obili?ed fro( the IM+ a d ,orld Ba *% The &o'er (e t also la" !hed a arra# of lo & o'erd"e a d $ide4ra &i & e!o o(i! refor(s% Aside fro( 'ario"s (eas"res of do(esti! liberali?atio ) the strate&# for restori & e0ter al se!tor health e(bra!ed si0 *e# pla *s% +irst) a d (ost i(porta tl#) the e0!ha &e rate $as (ade (ar*et4do(i ated after a t$o #ear tra sitio % It i(pro'ed &reatl# the i !e ti'es to e0porters a d to NRIs re(itti & f" ds to I dia thro"&h offi!ial !ha els% Correspo di &l# the r"pee !ost of i(porti & be!a(e hi&her% Most i(porta t) the pri!e of forei& e0!ha &e stopped bei & fi0ed b# politi!all# apprehe si'e &o'er (e ts% 9e!o d) the hea'# a ti4e0port bias (a d pro hi&h4!ost i(port s"bstit"tio bias) $as red"!ed thro"&h phased !"ts i o"r e0traordi aril# hi&h !"sto(s tariffs% Third) al(ost all the e!o o(i! (a d ot so e!o o(i!) e'ils of the i(port li!e se4 per(it ra> $ere &rad"all# phased o"t% +o"rth) there $as a de!isi'e ope i & "p to forei& dire!t a d portfolio i 'est(e t% +ifth) short ter( forei& debts $ere red"!ed a d stri!tl# !o trolled: (edi"( ter( !o((er!ial borro$i & $as also (ade s"b>e!t to pr"de tial !aps a d (i i("( (at"rities% +i all#) there $as a deliberate poli!# to b"ild "p forei& e0!ha &e reser'es to pro'ide (ore i s"ra !e a&ai st e0ter al stresses a d " !ertai ties% The fr"its of these poli!# thr"sts soo !a(e i bo" tif"l (eas"re% E0port &ro$th ?oo(ed "p to 6F per !e t i 5BB72B8 a d the t$o #ears thereafter% I $ard re(itta !es b# NRIs 1"adr"pled fro( t$o billio dollars i 5BBF2B5 to ei&ht billio i 5BB82BE a d rose f"rther to e0!eed t$el'e billio i 5BBC2BJ% The !"rre t a!!o" t defi!it i the Bo; e'er a&ai e0!eeded t$o per !e t of GD; a d a'era&ed o l# abo"t o e per !e t for the te #ears after 5BBF2B5% +orei& i 'est(e t soared fro( a e&li&ible h" dred (illio dollars i 5BBF2B5 to o'er C billio dollars i 5BBC2BJ% +orei& e0!ha &e
Page 3 26
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reser'es !li(bed steepl# fro( the pre!ario"s le'els of 5BB5 to o'er H 6C billio b# the e d of 5BBC2BJ% The debt ser'i!e ratio $as hal'ed o'er the de!ade% The !riti!al ratio of short4ter( forei& debt to fore0 reser'es (pro'e !riti!al a&ai i the re!e t Asia Crisis) pl"((eted do$ fro( the stratospheri! hei&hts of 5BB5 to a 'er# safe 6F per !e t i Mar!h 5BBE% It $o"ld be hard to fi d (ore !o 'i !i & e'ide !e of s"!!ess of the e0ter al se!tor refor(s% B"t (ore e'ide !e $as soo forth!o(i & as the &ales of !o ta&io s$ept thro"&h Asia i 5BBJ2BI% I dia@s e0ter al poli!ies of fle0ible e0!ha &e rates) stri!t !o trol of short4ter( borro$i & a d a(ple fore0 reser'es) ba!*ed b# ti(el# (o etar# poli!#) passed this ri&oro"s test $ith hi&h (ar*s% ,ith (a # *e# perfor(a !e i di!ators (s"!h as o'erall e!o o(i! &ro$th a d fis!al defi!it)) the #ear 5BBC2BJ see(s to (ar* a t"r i & poi t% E0port &ro$th dropped sharpl# that #ear a d has a'era&ed belo$ 5F per !e t i the last E #ears despite of a &ood re!o'er# i 6FFF2F5% +orei& i 'est(e t has a!t"all# falle si !e the pea* of 5BBC2BJ a d totaled o l# H7%8 billio !o ti "ed to i(pro'e b"t ot de!isi'el#% Re(itta !e i flo$s ha'e platea"ed after 5BBC2BJ%Tr"e) the !"rre t a!!o" t defi!it has re(ai ed lo$ b"t this (ai l# refle!ts the sta& atio of o 4oil i(ports be!a"se of a sl"&&ish i d"strial e!o o(#% O l# soft$are e0ports ha'e b"!*ed the la!*l"ster tre d of re!e t #ears% ,hat@s a(iss a d $hat sho"ld $e doG +irst) $e sho"ld dra$ the ri&ht lesso s fro( o"r earlier s"!!ess% The (ost i(porta t a d (ost e !o"ra&i & lesso is that $he $e p"rs"e &ood e!o o(i! poli!ies $e 1"i!*l# &et the re$ards i the for( of stro & e!o o(i! perfor(a !e% 9e!o d) the stre &th o"r e0ter al se!tor depe ds !r"!iall# o the prod"!ti'it# a d !o(petiti'e ess of o"r prod"!ers i a&ri!"lt"re) i d"str# a d ser'i!es% Ri&id labo"r la$s a d these are i(ple(e ted) the better% O"r reser'atio of prod"!ts of s(all s!ale i d"str# ha di!ap o"r !o(petiti'e ess% The soo er the b"d&et spee!h pro(ises o i frastr"!t"re se!tors of po$er) roads) ports a d rail$a#s are otorio"sl# i effi!ie t !o(pared to o"r i ter atio al !o(petitors% The soo er $e refor( the() the (ore !o(petiti'e o"r prod"!ers $ill be!o(e% O"r !"sto(s tariffs are "s"all# hi&h a d ha'e !ha &ed a little after the si?able red"!tio s bet$ee 5BB5 a d 5BBJ% prote!tio red"!es effi!ie !# a d prod"!ti'it#% /ere too) b"d&et spee!h i te tio s a$ait
Page 3 27
6FFF2F5% E0ter al debt i di!ators ha'e
TYBMS
f"lfill(e t% Third) forei& dire!t i 'est(e ts (+DI) !o"ld pla# a bi& role i boosti & o"tp"t) e0ports a d e(plo#(e t) as it has i Chi a $hi!h is host to al(ost 6F ti(es the a(o" t of +DI ea!h #ear tha $e are% The sa(e fa!tors of poor i frastr"!t"re) ri&id labo"r la$s) hi&h &o'er (e t borro$i &s a d $ea* e0port orie tatio that deter do(esti! i 'est(e t also i hibit +DI% O'er the past #ear the $orld e!o o(# has slo$ed a d I dia (li*e e'er#o e else) fa!es a to"&her e0ter al e!o o(i! e 'iro (e t% The disastro"sl# $ro & respo se to this $o"ld be to t"r (ore i $ard% O"r pai f"ll# slo$ e!o o(i! pro&ress i the three de!ades "p to 5BIF pro'ides a(ple testi(o # to ba *r"pt!# of i $ard4loo*i & de'elop(e t strate&ies% The !orre!t respo se is to i(pro'e prod"!ti'it# a d !o(plete harder% That (ea s i(ple(e ti & the poli!# priorities) oted abo'e) $ith e'e &reater 'i&o"r a d !o siste !#% O l# &ood e!o o(i! poli!ies $ill #ield (ore &ro$th) less po'ert# a d a stro &er e0ter al se!tor% ,e ha'e see that before a d $e ("st e s"re it i o"r f"t"re%
5667 % *I%N & .I*I*
%ND I T* I ,4%&T
The 9o"theast Asia !rises had se'eral !o((o ele(e ts. spe!"lati'e atta!* o the !"rre !ies ($ith sharp depre!iatio ): the a"thorities bei & for!ed to defe d the pl"((eti & !"rre !# b# depleti & lar&e 'ol"(es of i ter atio al reser'es: ba *i & !risis !o(pelli & the &o'er (e ts to e0te d (assi'e fi a !ial assista !e to ba *s thro"&h b"d&etar# s"pport to pre'e t a !ollapse%
A other disti &"ishi & feat"re of the !risis $as the effe!t of !o ta&io : !risis i o e !o" tr# spreadi & i to se'eral others i the re&io % The !o ta&io i(pa!t depe ded o the de&ree of fi a !ial (ar*ets i te&ratio as $ell as the e0isti & state of the e!o o(#%
The spe!"lati'e atta!*s $ere o those !o" tries@ !"rre !ies that $ere !o(peti & i the sa(e $orld (ar*ets for &oods a d !apital%
Page 3 28
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The Asia !risis had o l# a (ar&i al i(pa!t o I dia) $ith e&li&ible i(pa!t o her forei& e0!ha &e (ar*ets) the le'el of reser'es a d the ba *i & s#ste(% It has bee obser'ed that the (a!roe!o o(i! f" da(e tals pre'aili & at the ti(e !o"pled $ith the fle0ible e0!ha &e rate (a a&e(e t a d !o trol o short4ter( !apital flo$s helped I dia to $ithsta d the !"rre !# !risis%
The !rises de(o strated that the (a>or ob>e!ti'e of so" d debt (a a&e(e t poli!# !o"ld be to a!hie'e or (ai tai debt s"stai abilit#) $hile (eeti & *e# e!o o(i! (a!roe!o o(i! &oals%
At the ti(e of !"rre !# !risis I dia@s bala !e of pa#(e ts sit"atio had be!o(e s"stai able d"e both to a red"!tio i the !"rre t a!!o" t defi!it a d to a s"bsta tial i !rease i et !apital i flo$s% The !"rre t a!!o" t defi!it had falle fro( its pea* i 5BBF4 B5 to U9 H7%J billio i 5BBJ4BI: the later $as le'el of H B%I billio
esti(ated at 5%EP of the GD;%
The 5BBJ le'el of !"rre t a!!o" t defi!it as per !e t of GD; $as J%BP i Thaila d) 8%BP i Torea a d Mala#sia) 7%7P i I do esia a d 8%JP i ;hilippi es% I dia@s e0ter al debt at the e d of 5BBJ4BI $as HB6%B billio or 67%I per !e t of GD;% The debt4GD; ratio $as 'er# hi&h for the affe!ted 9o"theast Asia !o" tries. Thaila d (EC%IP)) I do esia (CJP)) ;hilippi es (E8P) a d Mala#sia (8BP)%
Table 6. 9ele!ted I di!ators of I dia@s E0ter al 9e!tor (P &ro$th " less oted) Ite(2Aear B54B6 B64B7 B74B8 B84BE BE4BC BC4BJ BJ4BI
5% Gro$th of E0ports 6% Gro$th of I(ports 7% E0ports2I(ports 468%E
45%5 5E%8
7%7 5F%F I8%I
6F%6 78%7 J8%I
5I%8 65%C J8%F
6F%7 5F%5 JF%6
8%E E%I I7%7
6%C
IC%J JJ%C
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8% Reser'es to I(ports
E%7
8%B JC%J 6J%E 45%I 85%F 7%7 7%7
I%C C8%E 6E%C 4F%8 7B%I 7%7
I%8 5I%I 6C%6 45%5 7E%I 7%C
C%F 5C%B 68%7 45%I 76%7 7%C
C%C 67%6 65%8 45%F 6I%6 7%7
J%F 6E%E 5I%7 45%E 6E%B 6%I 67%I 5B%I
E% 9hort4ter( debt2Reser'es C% Debt ser'i!e Ratio 7F%6
J% C"rre t a!!o" t bala !eQ 4F%8 I% E0ter al DebtQ B% Debt ser'i!e pa#(e tsQ Q As P of GD;
9o"r!e. E!o o(i! 9"r'e
The le'el of i ter atio al reser'es) $hi!h $as >"st H E%E billio i 5BB54B6) i !reased to H6B%8 billio 5BBJ4BI) pro'idi & abo"t J (o ths of i(ports !o'er% Ne'ertheless) e0ports !o ti "ed to fi a !e o'er IFP of I dia@ i(ports) th"s (a*i & the trade a!!o" t ear self4s"stai i &% B# the e d of Mar!h 5BBI) the !o(bi ed le'el of portfolio flo$s a d short4ter( debt !o stit"ted abo"t JE per !e t of the !o" tr#@s forei& e0!ha &e reser'es%
I deed) the e tire 'olatile i flo$s $ere said to ha'e bee added to reser'es that had &i'e s"ffi!ie t lee$a# for stabili?i & spe!"latio s i the forei& e0!ha &e (ar*ets% The et !apital i flo$s i to I dia i !reased fro( H8%J billio i 5BB54B6 to HB%E billio i 5BBC4BJ) $hi!h !a(e do$ (ar&i all# to HI%6 billio i 5BBJ4BI) be!a"se of the " !ertai do(esti! a d i ter atio al e 'iro (e t ((ai l# arisi & o"t of sa !tio s fro( the U9)% I the a&&re&ate) there $as alread# a shift to$ards o 4debt !reati & flo$s) b# $a# of forei& i stit"tio al i 'estors (+II) i to I dia@s debt a d e1"it# (ar*ets) e"ro e1"it# iss"es b# I dia !o(pa ies) $hi!h had rea!hed at HE%E billio i 5BBJ4BI%
Debt flo$s (to !o'er aid) !o((er!ial borro$i &s) NRI deposits) dra$i &s fro( IM+) i !o trast $as a!t"all# !o(i & do$ si& ifi!a tl#) rea!hi & abo"t H7%F billio i 5BBJ4BI%
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9hort4ter( debt $as repeatedl# !o sidered as a pre!ipitatio of forei&
i(porta t ris* fa!tor i
the
e0!ha &e !risis) espe!iall# $he
!o"pled $ith hi&h or
" s"stai able !"rre t a!!o" t defi!its% The share of short4ter( debt i the total debt $as >"st CP i I dia at the ti(e of !risis) $hi!h !o(pares $ith 85P i Thaila d) 6EP i I do esia) 6IP i Mala#sia a d 5BP i ;hilippi es% B# the e d of Mar!h 5BBI) the !o(bi ed le'el of portfolio flo$s a d short4ter( debt !o stit"ted abo"t JE per !e t of the !o" tr#@s forei& e0!ha &e reser'es% I deed) the e tire 'olatile i flo$s $as said to ha'e bee added to reser'es that had &i'e s"ffi!ie t lee$a# for stabili?i & spe!"latio s i the forei& e0!ha &e (ar*ets% It eeds to be re!o& i?ed that the short ter( flo$s also ha'e pro'ided the e!essaril# li1"idit# to a other$ise thi !"rre !# (ar*et i I dia%
The Asia !risis had therefore i(porta t poli!# lesso s) a d parti!"larl# i the !o te0t of e0ter al debt (a a&e(e t a d !apital flo$s% It is b# o$ ab" da tl# !lear that the !risis $as ot >"st be!a"se of the hi&h !"rre t a!!o" t defi!it b"t ("!h to do $ith the $a# the !"rre t a!!o" t defi!it $as fi a !ed) the at"re of !apital flo$s (s"!h as debt 's o 4debt !reati & flo$s)) a d fi all# the $a# e0ter al !apital bei & "sed for (s"!h as fi a !i & i 'est(e t as opposed to !o s"(ptio or o tradable)% The relati'e i((" it# to the !risis had also ("!h to do $ith the str"!t"re of !apital flo$s%
Altho"&h the I dia r"pee $as f"ll# !o 'ertible o the !"rre t a!!o" t) !o 'ertibilit# o the !apital a!!o" t fro t $as rather as#((etri!) $ith so(e$hat (ore restri!tio s o !apital o"tflo$s tha o i flo$s% ,ith !o trols o trade) forei& e0!ha &e tra sa!tio s a d short4ter( !apital flo$s) it $as therefore possible to i s"late the I dia e!o o(# fro( e0ter al sho!*s%
E0!ha &e rate $as !o sidered the (ost i(porta t 'ariable affe!ti & the !"rre !# !risis% After a de'al"atio of abo"t 66P i M"l# 5BB5 I dia shifted to a s#ste( fle0ible e0!ha &e rate (a a&e(e t based o <partial !o 'ertibilit#= i Mar!h 5BB6 a d fi all# to <(ar*et deter(i ed= e0!ha &e rate s#ste( i Mar!h 5BB7% The (ar*et dri'e e0!ha &e rate also had obli&ed the poli!# (a*ers to ha'e lo$er i flatio ) dis!ipli ed fis!al a d (o etar# poli!ies) a d stable real e0!ha &e rate for attai i & s"stai able bala !e of pa#(e ts%
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U der the !ir!"(sta !es the Reser'e Ba * retai ed the that rate fro( ti(e to ti(e% pe&&ed e0!ha &e rate re&i(e% I I additio
e!essar# fle0ibilit# i e0!ha &e rate also
(a a&i & the !"rre !#) b# 1"oti & its o$ refere !e rate a d a!ti'el# i ter'e i & at the (ar*et dri'e pre'e ted e0!essi'e ris*4ta*i & b# a&e ts that $o"ld ha'e o!!"rred a fi0ed or a fa!t) the e0iste !e of e0!ha &e ris*s ha'e dis!o"ra&ed so(e of the (ore
spe!"lati'e short4ter( !apital flo$s i to I dia) thereb# red"!i & the eed for poli!# i ter'e tio s%
Figure 4 : NEER & REER of the rupee

110 100 90 80 70 60
REER
NEER
50 40 30
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1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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The !o d"!t of e0!ha &e rate poli!# had also stabili?i & i(pa!t o the !"rre !# a d !apital flo$s p"rs"ed $ith appropriate (e!ha is(s of i ter'e tio a d sterili?atio % Loo*i & fro( the e0perie !e) o e oti!ed so(e *i d of self4bala !i & (e!ha is(s to ha'e $or*ed i the I dia forei& e0!ha &e (ar*ets% At a ti(e of e0!ha &e (ar*et press"re) the poli!# see(ed to ha'e bee ot to defe d the !"rre !# f"ll# b# spe di & reser'es a d) thereb#) offeri & the spe!"lators a eas# tar&et% I additio the (ar*et dri'e e0!ha &e rate also pre'e ted e0!essi'e ris*4ta*i & b# a&e ts that $o"ld ha'e o!!"rred a fi0ed or a pe&&ed e0!ha &e rate re&i(e% I fa!t) the e0iste !e of e0!ha &e ris*s ha'e dis!o"ra&ed so(e of the (ore spe!"lati'e short4ter( !apital flo$s i to I dia) thereb# red"!i & the eed for poli!# i ter'e tio s%
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E 3O13ING D E-T
%ND
& %4IT%1 F 1O+* * &EN%.IO T O+%.D* ;88<
I dia@s e0ter al H 556%5 billio stood at the e d of De!e(ber 6FF7) $hi!h i !reased fro( H I7%I billio i Mar!h 5BB5(Table 7)% The &ro$th rate d"ri & the period $as at a a "al a'era&e rate of 6 per !e t per a "(% 9o(e of the i !rease has bee d"e to 'al"atio !ha &es) res"lti & fro( the $ea*e i & of U9 dollar vis /a/ vis other !"rre !ies (for e0a(ple) H E%J billio o"t of HC%I billio i !rease i e0ter al debt d"ri & 6FF64F7 $as d"e to s"!h 'al"atio !ha &es)%
I ter(s of the le'el of o"tsta di & debt I dia ra *ed as eighth i 6FF6 fro( a(o & the top fiftee debtor !o" tries i the $orld) !o(i & after Bra?il) Chi a) R"ssia +ederatio ) Me0i!o) Ar&e ti a) I do esia a d T"r*e#% This i(plied a (ar*ed i(pro'e(e t i her debtor positio si !e 5BB5 forei& e0!ha &e !risis) $he her ra * $as third fro( a(o & the top fiftee debtor !o" tries) i%e% !o(i & after the t$o (ost hea'il# i debted !o" tries s"!h as Bra?il a d Me0i!o%
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Table 3* +ndia3- External Debt 1 6 End4Mar,5 2!!1 End4Mar,5 1 End4Mar,5 1 End4De, 2!!3
S5are in total External Debt
M"ltilateral Bilateral IM+ E0port Credit Co((er!ial Borro$i & NRI DepositsQ R"pee Debt 9hort4ter( Debt Total External debt S5are of .on,e--ional Debt to Total Debt
6FBFF 585CI 6C67 87F5 5F6FB 5F6FB 56I8J IE88 838!1 4498
6E 5J 7 E 56 56 5E 5F 1!!
6IC5C 5B657 67J8 E7JC 57IJ7 55F55 I677 EF78 B7J7F 4293
75 6F 7 C 5E 56 B E 1!!
75IBI 5E767 F E7CI 6766J 5J5E8 7F86 6J8E BIJEJ 369!
76 5C F E 68 5J 7 7 1!!
7FEEI 5JB86 F 8JJ7 6FEI6 6BICJ 6C7E EJJ7 55657F 3694
67S 8 mn9:
67S 8 mn9:
67S 8 mn9:
67S 8 mn9:
6J 5C F 8 5I 6J 6 E 1!!
So/r,e* I dia@s E0ter al Debt. A 9tat"s Report) Go'er (e t of I dia) 6FF7%
A i(porta t aspe!t of I dia@s e0ter al debt has bee its !o !essio alit#% As of De!e(ber 6FF7 abo"t 7C% 8 per !e t of the o'erall debt portfolio $as !hara!teri?ed b# !o !essio al debt) !o tra!ted (ai l# fro( ("ltilateral a d bilateral i stit"tio s% D"e to the !o !essio al at"re of i debted ess the prese t 'al"e !o !ept be!o(es the appropriate (eas"re) obtai ed b# dis!o" ti & the f"t"re debt ser'i!e pa#(e ts for i di'id"al loa s b# appropriate dis!o" t rates a d a&&re&ati & s"!h prese t 'al"es% The prese t 'al"es I dia@s e0ter al debt stood at H I6%B billio i the #ear 6FF6 $hi!h is IF per !e t of the total o"tsta di & debt% A!!ordi & to Global de'elop(e t +i a !e) the prese t 'al"e of e0ter al debt i the #ear 6FF6 $as 5J per !e t of GN;) lo$est $ithi the top fiftee debtor !o" tries e0!ept Chi a ($ith 58 per !e t i 6FF6)%
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45 40 35 30 25
28.7 38.7 37.5
E tern!" #e$t % &#P R!tio'
33.8 30.8 27 24.5 24.3 23.6 22.1 22.6 21.1
20.2
t n c r e P
20 15 10 5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
The effe!ti'e ess of debt (a a&e(e t poli!# sho"ld be >"d&ed i ter(s of the debt ser'i & !apa!it#) $hi!h !a be &a"&ed b# i di!ators (eas"ri & sol'e !# as $ell as li1"idit#% I Table 8 $e a al#?e the (ost !o((o l# "sed i di!ators debt s"stai abilit#. debt ser'i!e ratio) i terest ser'i!e ratio) debt to &ross do(esti! prod"!t ratio) short4ter( debt to total debt a d short ter( debt to forei& e0!ha &e reser'es% As see fro( Table there is re(ar*able i(pro'e(e t i all the ratios d"ri & 5BBF4 6FF7% The sto!* of e0ter al debt to GD; ratio de!li ed fro( its pea* of 7I%J per !e t i 5BB54B5 to 6F per!e t i 6FF64F7% The debt ser'i!e ratio $hi!h rea!hed a re!ord le'el of o'er 7E per !e t i 5BBF4B5) de!li ed steadil# to 58%J per !e t i 6FF64F7%
The (ost otable o"t!o(e of e0ter al debt (a a&e(e t d"ri & 5BBFs has bee the !o trol o'er short4ter( debt% The le'el of short4ter( debt a(o" ted to o l# U9 HE%F billio b# De!e(ber 6FF7% The share of short ter( debt to total debt de!li ed si& ifi!a tl# fro( o'er 5F per !e t i 5BBF4B5 to 8%8 per !e t i 6FF64F7) $hi!h a!t"all# $as the lo$est for I dia fro( a(o & the top 5E debtor !o" tries%
The 'ol"(e of short4ter( debt) $hi!h $as 58C per !e t of forei& e0!ha &e reser'es i 5BBF4B5) de!li ed to >"st C per !e t i 6FF64F7% B# ta*i & i to a!!o" t the
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resid"al2re(ai i & (at"rit# $ithi the !o(po e t of short4ter( debt) it still re(ai s (odest at H 56% J billio or 55%J per !e t of total e0ter al debt b# e d4De!e(ber 6FF7(Table E)%
Table 4* +ndi,ator- of Debt S/-tainabilit0 for +ndia

Aear D9R 5BBF4B5 5BB54B6 5BB64B7 5BB74B8 5BB84BE 5BBE4BC 5BBC4BJ 5BBJ4BI 5BBI4BB 5BBB4FF 6FFF4F5 6FF54F6 6FF64F7 D9R U Debt 9er'i!e 9ol'e !# I di!ators I9R DGD; Li1"idit# I di!ators 9TD2+ER
9TD2TD
7E%7 5E%E 6I%J 5F%6 58C%E 7F%6 57%F 7I%J I%7 JC%J 6J%E 56%E 7J%E J%F C8%E 6E%8 5F%E 77%I 7%B 5I%I 6C%6 B%J 7F%I 8%7 5C%B 68%7 I%I 6J%F E%8 67%6 65%6 J%7 68%E J%6 6E%E 5B%F J%E 68%7 E%8 5J%6 5J%I J%I 67%C 8%8 57%6 5C%6 J%7 66%5 8%F 5F%7 5J%6 C%C 66%8 7%C I%C 57%B E%8 65%F 6%I E%5 58%J 8%5 6F%7 8%8 C%5 Ratio: I9R U I terest 9er'i!e Ratio: DGD; U Debt to Gross Do(esti! ;rod"!t
Ratio: 9TD U 9hort4Ter( Debt: TD U Total Debt: +ER U +orei& E0!ha &e Reser'es% So/r,e. Reser'e Ba * of I dia
Table 5* +ndia;- S5ort Term External Debt b0 #e-id/al Mat/rit0 6U9 H (illio )
9hort4ter( debt b# ori&i al (at"rit#

Lo &4ter( debt (at"ri & $ithi o e #r
5BBI E)F8C (E%8) C)J67 (J%6)
5BBB 8)6J8 (8%8) J)FEB (J%7)
6FFF 7)B7C (8%F) I)7EB (I%E)
6FF5 7)C6I
6FF6 6)J8E
(7%C) (6%I) C)JCJ 55)8CE (C%J) (55%C)
Total 9hort4ter( debt b# resid"al (at"rit#
55)JCB 55)777 56)6BE 5F)7BE 58)65F (56%C) (55%J) (56%E) (5F%7) (58%8) $ote* +i&"res i the bra!*et represe t per !e t to total e0ter al debt% So/r,e* I dia@s E0ter al Debt. A 9tat"s Report) M" e 6FF7% Page 3 37
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Table 5* #e-er<e +ndi,ator- for +ndia
Aear
I(port Co'er of Reser'es((o ths)
Reser'es to E0ter al Debt J%F 5F%I 5F%B 6F%I 6E%8 67%5 6I%7 75%8 77%E 7I%J Page 3 38
Reser'es to 9hort Ter( debt CI%7 57F%8 5EE%5 E7F%B EBF%F 87F%I 7B6%I EI6%F JCF%6 BCC%8
5BBF4B5 5BB54B6 5BB64B7 5BB74B8 5BB84BE 5BBE4BC 5BBC4BJ 5BBJ4BI 5BBI4BB 5BBB4FF
6%E E%7 8%B I%C I%8 C%F C%E C%B I%6 I%6
TYBMS
6FFF4F5 6FF54F6 6FF64F7
I%C 55%7 57%I
85%I E8%I J6%F
5)5CE%8 5)BJ5%5 5)CEF%B
So/r,e. Reser'e Ba * of I dia
The le'el of forei& e0!ha &e reser'es $e t "p fro( >"st 6%E (o ths of i(port !o'er d"ri & 5BBF4B5 is !"rre tl# s"ffi!ie t for o'er a #ear i(ports% The b"ild"p reser'es $ere a o"t!o(e of the !apital a!!o" t ope i & i I dia as $ell as offi!ial poli!# *eepi & i 'ie$ the fa!tors s"!h as the le'el of !"rre t a!!o" t defi!it: the si?e of short4ter( liabilities) debt ser'i!i &) the possible 'ariabilit# i portfolio i 'est(e ts a d other t#pes of !apital flo$s: " a ti!ipated press"res o the bala !e of pa#(e ts arisi & o"t of e0ter al sho!*s s"!h as oil pri!e hi*es% Loo*i & at the se!toral !o(positio of e0ter al debt o e fi ds that the share of &o'er (e t a d &o'er (e t &"ara teed debt a!!o" t for abo"t 8I per !e t of total e0ter al debt i De!e(ber 6FF7% Debt !o tra!ted b# the !orporate se!tor) $hi!h also i !l"de &o'er (e t o$ ed p"bli! se!tor " derta*i &s) are sho$i & a i !reasi & tre d%
Table C. Go'er (e t G"ara teed E0ter al Debt (H Millio s) 1 5 Go't% Debt 6 No 4Got Debt 8 Total E0ter al Debt(5V6) a% +i a !ial 9e!tor b% ;"bli! 9e!tor !%;ri'ate 9e!tor E Go't% Debt a d G"ara teed Debt(5V7) C J ;er!e t of Go't% Debt a d G"ara teed Debt to Total E0ter al Debt(E28) ;er!e t of Go't% G"ara teed Debt to No 4 Go't Debt(726) 6I%I 65%F 5E%E 58%5 55%5 56%J 55%F J5%I CE%I EJ%E EE%F 8B%I E5%7 8C%I 4 1 6 1 8 1 2!!1 2!!2 2!!3 8EC8J CC8I7 CIE5 5IFJ 8BIE EB E68BI
EEB87 E7FBE 8CE6F 8C57J 7CJE6 8FC7E 8JF55 EFJ8B IE8E 5FBI JFJF 7JJ J6CB 6767 8CFE 785 J5J8 68BC 87C7 75E
88F6J 87C5B EJ5FE EE57I C75E 586B 8C7B 68J JF66 5JC5 EFJF 5B5
B6CBE B7J7F B7E75 BCIIC 5F5576 BIJEJ 55657F 5JFB IE77 76C
7 of $hi!h $ith Go't% G"ara teeQ.( aVbV! ) 5FECI
CCE55 C5C8F E7JIB E7755
EF786 EFC85
Co(pari & the e0ter al debt i di!ators of the top 5E debtor !o" tries for the #ears 5BBF a d 6FF5 o e obser'es 'er# !o(fortable sit"atio for I dia (Table J)% I dia@s
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debt had &ro$ at 5I per !e t as !o(pared to o'er 7FF per!e t rise i Torea) Chi a) Mala#sia a d R"ssia +ederatio a d o'er 6FF per !e t rise i Ar&e ti a) Bra?il) Chile) Colo(bia) I do esia a d T"r*e#% Most of the sol'e !# i di!ators for I dia ha'e sho$ per!eptible i(pro'e(e t d"ri & the de!ade a d fare $ell fro( a(o & the top fiftee i debted !o" tries. le'el of e0ter al debt to e0ports of &oods a d ser'i!es) e0ter al debt to GN;) debt ser'i!e ratio a d i terest ser'i!e ratio) et! all sho$ !o siderable i(pro'e(e t d"ri & the de!ade% The ad>"st(e ts i the debt i di!ators are far better for I dia as !o(pared to all other debt !o" tries) parti!"larl# i the post Asia !risis #ears%
COM;O9ITION O+ CA;ITAL +LO,9

The patter of !apital flo$s i to I dia re'eals a shift i its !o(positio ) fro( debt to o 4debt !reati & flo$s $ith de!reasi & i(porta !e of short4ter( flo$s s"!h as forei& !"rre !# deposits a d short ter( debt) a d a i !reasi & share of forei& dire!t a d portfolio i 'est(e t flo$s(Table I)% The share of o 4debt flo$s i total !apital flo$s ha'e i !reased to 8C%C per !e t d"ri & 6FF64F7% ;ortfolio i 'est(e ts flo$s fro( +IIs are allo$ed si !e 5BB7) the !"("lati'e i 'est(e t of $hi!h $as H 5B billio i 6FF7 $ith abo"t 5F per !e t of the total (ar*et !apitali?atio of the I dia sto!* (ar*et%
Table 7* .om=ari-on of External Debt +ndi,ator- of To= 1ifteen Debtor .o/ntrie-
Page 3 4!
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.o/ntr0
Debt
.on,e--ional PP) to Total Debt 5BBF JE%7 J7%6 E8%6 I6%7 IE%6 6FF5 JE%5 85%7 58%E E7%B EB%7 Debt 6?: 5BBF F%I 6%E 5%B 5J%C E%J 6FF5 5%F 5%6 F%B 5E%8 6%8
External Debt to External debt ./rrent re,ei=t5BBF 7J7%J 76E%E 5JB%C B5%8 5I5%F 6FF5 7J7%J 758%8 5C6%C E8%B 65F%C to national +n,ome 5BBF 8C%F 6C%E CJ%7 5E%6 8E%5 6FF5 E6%E 8C%B CF%F 5E%F 8C%6
Debt Ser<i,e +ntere-t Ser<i,e #atio 5BBF 7J%F 66%6 6E%B 55%J 8F%B 6FF5 CC%7 JE%8 6I%5 J%I 7C%5 #atio 5BBF 5C%7 C%5 5C%J E%8 5J%B 6FF5 6B%B 67%C I%7 6%E 5E%7
S5ort Term Debt to Total Debt 5BBF 5C%I 5B%I 5J%C 5C%I I%8 6FF5 58%C 56%E C%J 6E%I 5F%6
S5ort Term Debt to #e-er<e5BBF 66I%5 75I%J EE%J 75%E 75%5 6FF5 57J%8 JB%5 5J%I 6F%8 7C%I
(/t-tanding Debt to Total 68 billion: Aears 5BBF 6FF5 Ar&e ti a C6%6 57C%J Bra?il Chile Chi a 56F%F 66C%8 5B%6 7I%8
EE%7 5JF%5 7C%J
Colo(bia 5J%6
India
:<=: 6:=:
>?=6 <@=8 :>=6

6C%8 56%C 58%C F%I 6F%F J%J F%F 5E%6 5E%5 6F%J F%7 J%7 F%J 65%7 B%B F%F 56%C 7%E CI%J E7%J JE%C J6%J JI%C JB%E IF%5 88%8 JI%C
:?=8
EF%8 7F%C EE%E E8%E CE%7 7B%I CC%I 7B%6 8I%C
<;:=6
677%B 8E%C 88%8 5B5%8 67F%5 6E5%7 %% IB%I 5BC%5
5;5=@
6FE%B EI%E 85%C IE%E 56E%5 557%E 56I%F I8%6 6FE%J
;:=7
C8%F 57%I 7C%8 85%5 CB%8 II%I 5F%7 77%7 76%E
;5=8
BJ%6 6C%5 E8%8 6C%6 CB%6 7E%J EF%B CF%8 JI%I
<?=<
77%7 5F%I 56%C 6F%J 6J%F 8%B %% 5C%B 6B%8
5<=6
67%C 57%I C%F 6C%5 5I%C 6I%F 58%E 6E%5 8F%F
5?=?
57%7 7%8 7%8 57%8 57%7 5%J %% C%E 57%E
?=>
I%B 6%I 6%5 C%B C%J E%F C%C 8%5 55%5
58=;
5E%B 7F%B 56%8 5E%8 58%E 5B%8 5B%B 6B%C 5B%6
;=:
5C%5 75%B 55%I 55%8 55%C 55%6 57%J 5B%C 58%6
<@?=>
58B%7 J7%F 5B%E 5C7%5 8JB%5 657%C %% C6%C 5EJ%F
?=>
IF%F 78%6 5C%J 8F%6 8E%F 6J%6 C8%8 8F%B IC%C
I do esia CB%B 57E%J Torea) Rep% 7E%F 55F%5 Mala#sia Me0i!o 5E%7 87%8
5F8%8 5EI%7 E6%8 C6%8
;hilippi es 7F%C ;ola d 8B%8
R"ssia +ed EB%7 5E6%C Thaila d T"r*e# 6I%5 CJ%8 8B%8 55E%5
Table * .om=o-ition of .a=ital +nflo>- to +ndia T#pes of +lo$s Total $et .a=ital +nflo>-68 bn: ;ERCENT No 4debt Creati & I flo$s a) +DI b) ;ortfolio I 'est(e t Debt Creati & I flo$s a) E0ter al Assista !e b) ECB W !) 9hort4 ter( Credits d) NRI Deposits 5%E 5%8 F%5 I7%7 75%7 75%B 5E%6 65%I 55J%E E6%8 CE%5 EJ%J 65%C 75%6 5%6 6J%F E8%I 7C%6 5I%C E6%8 B%6 8F%C 45%F 55%8 8B%J 6F%J 6B%F 67%5 I%C 7%F 7%C 58%J CJ%I 8F%6 6J%C EB%8 8%7 7J%6 5%F 67%5 JJ%5 EI%F 5B%5 B%6 55%8 458%B 4I%8 6C%F 8C%C 7I%E I%5 45F%C 46F%F 45B%8 I%5 68%C 5BBF4B5 791 5BBE4BC 5BBJ4BI 5BBB4FF 491 98 1!94 6FFF4F5 1!9! 6FF54F6 6FF64F7 1!96 1291
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e) R"pee Debt 9er'i!e Other Capital X Total (5 to 7) ,emoA E0!l"di & b Y !Q W refers to (edi"( a d lo &4ter( borro$i &s So/r,e* Reser'e Ba * of I dia%
45C%B 5E%6 5FF%F I8%J
467%7 4JE%6 5FF%F 77%J
4J%I 4J%6 5FF%F I6%8
4C%I 6J%6 5FF%F CJ%8
4C%6 46J%6 5FF%F J5%8
48%B 57%J 5FF%F IB%7
47%B C8%F 5FF%F I7%I
Table 1!* Portfolio +n<e-tment in +ndia 67S 8 Million:
GDRs2ADRsW 5BB64B7 68F 5BB74B8 5)E6F 5BB84BE 6)FI6 5BBE4BC CI7 5BBC4BJ 5)7CC 5BBJ4BI C8E 5BBI4BB 6JF 5BBB4FF JCI 6FFF4F5 I75 6FF54F6 8JJ 6FF64F7 CFF
+IIsQ 5 5)CCE 5)EF7 6)FFB 5)B6C BJB 47BF 6)57E 5)I8J 5)EFE 7JJ
Offshore f" ds 7 7I6 67B EC 6F 6F8 EB 567 I6 7B 6
Total 688 7)ECJ 7)I68 6)J8I 7)756 5)I6I 4C5 7)F6C 6)JCF 6)F65 BJB
W. Represe ts the a(o" t raised b# I dia !orporates thro"&h Global Depositor# Re!eipts (GDRs) a d A(eri!a Depositor# Re!eipts (ADRs)% Q. Represe ts fresh i flo$ of f" ds b# +orei& I stit"tio al I 'estors% So/r,e. Reser'e Ba * of I dia
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9;ECIAL ;UR;O9E EXTERNAL COMMERCIAL BORRO,ING

The I dia Go'er (e t had obtai ed e0ter al borro$i & "si & spe!ial pro'isio s three ti(es si !e 5BB5. I dia De'elop(e t Bo ds (IDBs)) 5BB5: Res"r&e t I dia Bo ds (RIBs)) 5BBI: a d) I dia Mille i"( Deposits (IMDs)) 6FFF% These borro$i &s $ere "sed o l# to (eet the " fa'orable e0ter al !ir!"(sta !es) a d ser'ed as alter ati'e to so'erei& borro$i &s% The (at"rit# of these iss"a !es $ere abo"t fi'e #ears) (ostl# s"bs!ribed b# o 4reside t I dia s) $ith rede(ptio o l# at (at"rit# a d offeri & reaso able spread o'er !o(parable &o'er (e t bo d #ields% These i str"(e ts $ere !o sidered as s"bstit"tes for forei& !"rre !# deposits) $hi!h e0te ded the d"ratio of the !o" tr#@s debt profile%
Table 11* S=e,ial Borro>ing- b0 +ndia -in,e 1 1
T#pe of Borro$i &s
A(o" t(U9 H I terest Rate Millio ) (P)
E4Aear Go'er (e t Bo d Aield
9pread (Col 748)
+ndia Millenni/m De=o-it-@ 2!!! Mobili?atio i U9 Dollar Mobili?atio i ;o" d 9terli & Mobili?atio i E"ro #e-/rgent +ndia Bond-@ 1 8 Mobili?atio i U9 Dollar Mobili?atio i ;o" d 9terli & Mobili?atio i E"ro +ndia De<elo=ment Bond-@ 1 1 Mobili?atio i U9 Dollar Mobili?atio i ;o" d 9terli & So/r,e* I dia@s E0ter al Debt. A 9tat"s Report) Go'er
5@52! E)5I6 I%EF 6EI J%IE IF C%IE 4@23! 7)BIJ J%JE 5IF I%FF C7 C%6E 1@627 5)7FJ B%EF 76F 57%6E (e t of I dia) O!tober 6FF5%
E%EJ 8%C7
6%B7 7%66
E%6C E%8E
6%8B 6%EE
J%IC B%B6
5%C8 7%77
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+OREIGN CURRENCA DE;O9IT9

Ma # !o" tries allo$ forei& !"rre !# deposits fro( e0patriates as a so"r!e for bala !e of pa#(e ts fi a !i &% 9"!h s!he(es $ere i trod"!ed i I dia i 5BJF allo$i & o 4Reside t I dia s2O'erseas Corporate Bodies to pla!e deposits de o(i ated i forei& !"rre !# as $ell as lo!al !"rre !# $ith the I dia ba *s) $ith i terest rate fi0ed a d e0!ha &e rate &"ara teed b# the Reser'e Ba * of I dia% The t$o oil sho!*s of 5BJFs bro"&ht s"bsta tial a(o" t of U9 dollar deposits fro( the &"lf !o" tries% B# the e d of Mar!h 5BBF) the total NRI deposits $ere to the e0te t of H 56 billio % /o$e'er these short4ter( deposits ha'e pro'ed to be 'er# 'olatile) respo di & to (a!roe!o o(i! i stabilit# as $ell as politi!al ris*s% The e0ter al pa#(e ts diffi!"lties of 5BBF4B5 de(o strated the '"l erabilit# asso!iated $ith these deposits%
Co sideri & the h"&e fis!al !osts of e0!ha &e &"ara tee a d hi&her i terest rates offered o s"!h deposits as !o(pared to i ter atio al rates) the poli!# later #ears $ithdre$ the e0!ha &e rate &"ara tee a d red"!ed !o siderabl# the i terest rate spread% A s!he(e !alled No 4reside t No 4 repatriable R"pee Deposit (NRNRRD) $as also i trod"!ed i order to a'oid the re'ersibilit# !hara!ter of the deposits) b"t $as later $ithdra$ i April 6FF6%
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12* (/t-tanding Balan,e- $#+ De=o-it S,5eme- 67S 8 million:
E d4
NR(E)RA
+CNR(A)Q
+CNR(B) NR(NR)RDQQ K K K K 6)8IC 7)E86 E)CF8 C)6C6 C)C5I C)JE8 C)I8B J)FE6 7)8FJ
+C(O)N K K K K 5F 57 8 6 K K K K K
Total 8F 5)F88 7)FJ8 56)85E 5J)5CC 5J)88C 6F)7B7 6F)7CB 6F)8BI 65)CI8 67)FJ6 6E)5J8 6I)E6B
Mar!h 5BJE 8F K K 5BIF IEC 5II K 5BIE 6)7F8 JJF K 5BBF 7)JJJ I)C7I K 5BBE 8)EEC J)FE5 7)FC7 5BBC 7)B5C 8)6EE E)J6F 5BBJ 8)BI7 6)7FC J)8BC 5BBI E)C7J 5 I)8CJ 5BBB C)F8E K J)I7E 6FFF C)JEI K I)5J6 6FF5 J)58J K B)FJC 6FF6 I)88B K B)CJ7 6FF7 58)B67 K 5F)5BB Q . ,ithdra$ effe!ti'e A"&"st 5BB8% QQ . ,ithdra$ effe!ti'e April 6FF6%
So/r,e* Reser'e Ba * of I dia%
Let "s 'ie$ the fi a !ial hi&hli&hts of the fis!al 6FFE4FC i for( of !harts a d tables i the e0t !hapter%
INDIA@9 EXTERNAL DEBT A9 AT T/E END O+ MARC/ 6FFC

&)..ENT *&EN%.IO
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I dia@s total e0ter al debt is pla!ed at U9 H 56E%6 billio at the e d of Mar!h 6FFC% At this le'el) the e0ter al debt sto!* i !reased b# abo"t U9 H 6 billio o'er the e d4Mar!h 6FFE le'el (Chart 5)%
The 'al"atio effe!t) o a!!o" t of appre!iatio of the U9 dollar a&ai st other (a>or i ter atio al !"rre !ies) has had a (oderati & i(pa!t o the sto!* of e0ter al debt%
A(o & the 'ario"s !o(po e ts of debt) NRI deposit) trade !redit a d ("ltilateral debt ha'e rise d"ri & the #ear (Table 6)%
E0ter al !o((er!ial borro$i &s (ECBs)) bilateral a d r"pee debt de!li ed d"ri & the #ear% E0ter al !o((er!ial borro$i &s re!orded et o"tflo$s d"e to o e4off effe!t of pri !ipal repa#(e t of I dia Mille i"( Deposits (IMDs) (U9 H E%E billio ) (Table 6) (Chart 6)%
Table 2* 'ariation in External Debt b0 .om=onent-
+tem
%t t5e end4of
'ariation d/ring 2!!54!6
Mar,5 !6 %mo/nt
Mar,5 !5 %mo/nt %b-ol/te <ariation Per,entage <ariation
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67S 8 million:
(5) (6)
67S 8 million:
(7)
67S 8 million:
(8)
6Per ,ent:
(E)
), 3ultilateral
76)EEI (6C%F)
75)JF6 (6E%J)
IEC
6%J
4, 5ilateral
5E)JI8 (56%C)
5C)B7F (57%J)
45)58C
4C%I
6, I3.
F (F%F)
F (F%F)
F%F
7, !rade Credit a, Above ) year

E)76C (8%7) 8)BIF (8%5) 78C C%B
b, #pto ) year8
I)JII (J%F)
J)E68 (C%5)
5)6C8
5C%I
9, Commercial 5orro ings
6E)ECF (6F%8)
6J)F68 (65%B)
45)8C8
4E%8
:, NRI "eposits 'long/term+
7E)578 (6I%5)
76)J87 (6C%C)
6)7B5
J%7
;, Rupee "ebt
6)F75 (5%C)
6)7F5 (5%B)
46JF
455%J
:=Total Debt
1@25@181 61!!9!:
1@23@2!4 61!!9!:
1@ 77
196
3emo Items A, Long/!erm "ebt

5)5C)7B7 (B7%F) 5)5E)CIF (B7%B) J57 F%C
5, 0hort/!erm "ebt
I)JII (J%F)
J)E68 (C%5)
5)6C8
5C%I
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The U9 dollar $as the (ost i(porta t !"rre !# i the !"rre !# !o(positio of I dia@s e0ter al debt at e d4Mar!h 6FFC) a!!o" ti & for 8E%5 per !e t of total e0ter al debt sto!* (Chart 7)%
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I NDI&%TO.*
OF
D E-T * )*T%IN%-I1IT2
There has bee a per!eptible i(pro'e(e t i e0ter al debt i di!ators o'er the #ears refle!ti & the &ro$i & s"stai abilit# of e0ter al debt of I dia%
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E0ter al debt to GD; has dropped to 5E%I per !e t at e d4Mar!h 6FFC fro( 5J%7 per !e t at e d4Mar!h 6FFE a d 7F%I per !e t at e d4Mar!h 5BBE%
The debt ser'i!e ratio has rise to 5F%6 per !e t d"ri & 6FFE4FC fro( C%5 per !e t d"ri & 6FF84FE lar&el# d"e to IMD repa#(e ts% It (a# be i di!ated that debt ser'i!e ratio $as 5J%5 per !e t i 5BBB46FFF%
Refle!ti & the rise i short ter( debt d"ri & 6FFE4FC) the ratio of short4ter( to total debt a d short ter( debt to reser'es rose to J%F per !e t a d E%I per !e t) respe!ti'el# (Table 7)%
Table 3* +ndi,ator- of Debt S/-tainabilit0 'in per cent+
I di!ators (5) Total debt 2GD; 9hort4ter(2Total debt 9hort4ter( debt2Reser'es Co !essio al debt2Total debt Reser'es2 Total debt Debt 9er'i!e RatioQ Q relates to fis!al #ear 6FFE4FC a d 6FF84FE
E d4Mar!h FC (6) 5E%I J%F E%I 75%E 565%5 5F%6
E d4Mar!h FE (7) 5J%7 C%5 E%7 77%7 558%B C%5
The share of !o !essio al debt i total e0ter al debt de!li ed to 75%E per !e t at e d4Mar!h 6FFC fro( 77%7 per !e t at e d4Mar!h 6FFE (Table 7)% It (a# be re!alled that this ratio $as aro" d 8E%B per !e t at e d4Mar!h 5BB5% This de'elop(e t i di!ates a &rad"al i !rease i o 4!o !essio al pri'ate debt i I diaNs e0ter al debt sto!*% At this le'el) ho$e'er)
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!o !essio al debt !o ti "es to be a si& ifi!a t proportio espe!iall# b# i ter atio al !o(pariso %
of the total e0ter al debt)
I dia@s forei& e0!ha &e reser'es e0!eeded the e0ter al debt b# U9 H 6C%8 billio pro'idi & a !o'er of 565%5 per !e t to the e0ter al debt sto!* at the e d of Mar!h 6FFC (Chart 8)%
;OLICA ;ER9;ECTIDE9 ON EXTERNAL DEBT MANAGEMENT

The debt (a a&e(e t poli!# follo$i & the bala !e of pa#(e ts !risis e'ol'ed i to a ("lti4 pro &ed strate&#% This e'ol'i & poli!# re&i(e $as based broadl# o the re!o((e datio s of the Ra &ara>a Co((ittee (5BB7) $hi!h i(plied (i) the !o ti "atio of a a "al !ap) (i i("( (at"rit# restri!tio s a d prioriti?i & the "se of ECBs: (ii) LIBOR based !eili &s o i terest rates
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a d (i i("( (at"rit# re1"ire(e ts o NRI deposits to dis!o"ra&e the 'olatile !o(po e t of s"!h deposits: (iii) !o tai (e t of short4ter( debt to&ether $ith !o trols to pre'e t its " d"e i !rease i f"t"re: (i') retiri &2 restr"!t"ri &2 refi a !i & of (ore e0pe si'e e0ter al debt: (') (eas"res to e !o"ra&e o 4debt !reati & fi a !ial flo$s s"!h as forei& dire!t a d portfolio i 'est(e ts: ('i) i !e ti'es a d s!he(es to pro(ote e0ports a d other !"rre t re!eipts: a d ('ii) !o s!io"s b"ild4"p of forei& e0!ha &e reser'es to pro'ide effe!ti'e i s"ra !e a&ai st e0ter al se!tor " !ertai ties%
These poli!ies p"rs"ed $ith 'ar#i & i te sit# #ielded &ood res"lts i (a*i & a t"r aro" d i I dia@s e0ter al debt s!e ario) $hi!h is refle!ted i the s"stai ed i(pro'e(e t i her *e# debt i di!ators% A tra spare t poli!# o e0ter al !o((er!ial borro$i &s $ith the stated ob>e!ti'es of pr"de t debt (a a&e(e t see(s to ha'e e(er&ed i re!e t #ears% I dia be&a !o sideri & the eed for a ;"bli! Debt Ma a&e(e t Offi!e i 6FFF% Atte tio $as fo!"sed o b"ildi & "p of the i stit"tio al !apabilit# for debt a al#sis for effe!ti'e p"bli! debt (a a&e(e t a d a appropriate i stit"tio al str"!t"re for it i the p"bli! se!tor%
The i stit"tio al arra &e(e t of debt reporti & is shared bet$ee the Mi istr# of +i a !e (MO+) a d the Reser'e Ba * of I dia (RBI)) $ith the E0ter al Debt Ma a&e(e t U it (EDMU) i the Mi istr# of +i a !e ser'i & as the ape0 " it for (o itori &) !o(p"teri?atio a d (a a&e(e t related de!isio s% The (a>orit# of the !o" tr#@s total e0ter al debt data relati & to e0ter al assista !e a d e0ter al !o((er!ial borro$i &s ha'e bee !o(p"teri?ed o the Co((o $ealth 9e!retariat Debt Re!ordi & a d Ma a&e(e t 9#ste((C9 . DRM9)%
The ECB &"ideli es iss"ed b# the Mi istr# of +i a !e fro( ti(e to ti(e p"t a !ap o the o'erall a(o" ts that !a borro$i &) !aps o be borro$ed i a fi a !ial #ear) allo$i & a lo &er (at"rit# for lar&er e d4"se (9ee the Appe di0)% These borro$i & !ost a d restri!tio s o
restri!tio s ha'e pro'ed to be helpf"l i a'oidi & debt4ser'i!i & diffi!"lties% The a "al re'ie$ of a !ap o ECB is fi0ed !o sideri & the re1"ire(e t of differe t se!tors a d the (edi"( ter( bala !e of pa#(e ts s!e ario% ECB appro'als are (o itored re&"larl# to e s"re that the total debt is (ai tai ed $ithi the li(its of debt (a a&e(e t%
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The ECB &"ideli es i
a $a# i(pose restri!tio s o
the le'era&i & !apabilities of I dia
!o(pa ies i ter(s of the a(o" ts a d the periods for $hi!h the borro$i &s !a be (ade% Corporate a!!ess e0ter al !o((er!ial borro$i &s for e0pa sio of e0isti & !apa!ities as $ell as for fresh i 'est(e t% At the (o(e t differe t r"les appl# for differe t for(s of fi a !i & $hi!h therefore restri!ts the !hoi!e of fi a !i & a'ailable%
I this $a#) to a lar&e e0te t) f" di & depe ds "po the &o'er (e t r"les rather tha the !hara!teristi!s of the pro>e!ts% There are o so'erei& &"ara tees: !orporate toda# a!!ess o'ersees !apital (ar*ets based o the stre &th of their bala !e4sheet a d their bra d% The &o'er (e t has rela0ed re!e tl# to prepa# e0ter al debt) th"s the possibilities for lo$eri & the i terest !osts d"e to falli & i terest rate e 'iro (e t%
The !o !er is &rad"all# shifti & to$ards (a a&i & !orporate borro$i &) as the 'ol"(e of e0ter al debt o the &o'er (e t a!!o" t has bee de!reasi &% Corporate !a also " derta*e liabilit# (a a&e(e t for hed&i & the i terest a d e0!ha &e rate ris*s o their " derl#i & forei& !"rre !# e0pos"res $itho"t prior appro'al of the Mi istr# of +i a !e or the Reser'e Ba * of I dia%
The poli!# &i'es &reater priorit# for pro>e!ts i the i frastr"!t"re) !ore a d e0port se!tors% The re&"lator# str"!t"re has bee e'ol'i & to i fl"e !e the a!ti'ities that $o"ld be fi a !ed thro"&h e0ter al borro$i &s) thereb# restri!ti & the f" ds fro( re!#!li & i to fi a !ial (ar*ets as $ell as real estate% To le &the the (at"rit# profile of e0ter al debt) !o((er!ial borro$i &s of ei&ht #ears a d abo'e are *ept o"tside the !eili &%
Teepi & i 'ie$ the 'olatilit# the short ter( !apital flo$s are (o itored a d restri!ted (ostl# for trade related p"rposes% As re&ards the forei& !"rre !# a d lo!al !"rre !# de o(i ated deposits) fro( the o 4reside t I dia s) there has bee a si& ifi!a t !ha &e i ter(s of the
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re(o'al of e0!ha &e &"ara tees pro'ided b# ba *s) &rad"al shift i poli!# i fa'or of lo!al !"rre !# de o(i ated deposits) pro(otio of o 4repatriable deposits) a d ali& i & i terest rates to i ter atio al rates s"!h as LIBOR%
EXTERNAL COMMERCIAL BORRO,ING9 ;OLICA GUIDELINE9

E0ter al Co((er!ial Borro$i &s (ECB) refer to !o((er!ial loa s a'ailed fro( o 4reside t le ders $ith (i i("( a'era&e (at"rit# of 7 #ears% Borro$ers !a raise ECB fro( i ter atio all# re!o& i?ed so"r!es s"!h as (i) i ter atio al ba *s) i ter atio al !apital (ar*ets) ("ltilateral fi a !ial i stit"tio s (s"!h as I+C) ADB) (ii) e0port !redit a&e !ies a d (iii) s"ppliers of e1"ip(e t) forei& !ollaborators a d forei& e1"it# holders%
%= % &&E** , E&'%NI*,
U der the prese t fra(e$or*) ECB !a be raised thro"&h t$o ro"tes 'i?% (i) A"to(ati! Ro"te a d (ii) Appro'al Ro"te%
Page 3 54
TYBMS 6i: (ii) %/tomati, #o/te
Eligible Borro>er-* Corporates re&istered " der the Co(pa ies A!t e0!ept fi a !ial i ter(ediaries (s"!h as ba *s) fi a !ial i stit"tio s@ (+is)) ho"si & fi a !e !o(pa ies a d NB+Cs) are eli&ible%
.a-e- ,on-idered*
(i)
(ii)
Up to U9D 6F (illio or e1"i'ale t $ith (i i("( a'era&e (at"rit# of 7 #ears%

Abo'e U9D 6F (illio a d "p to U9D EFF (illio or e1"i'ale t $ith (i i("( (at"rit# of E #ears%
Eligible Borro>er-*
a) +i a !ial I stit"tio deali & e0!l"si'el# $ith i frastr"!t"re or e0port fi a !e $ill be !o sidered o a !ase b# !ase basis%
b) Ba *s a d +i a !ial I stit"tio s $hi!h ha'e parti!ipated i the te0tile or steel se!tor restr"!t"ri & pa!*a&es appro'ed b# the Go'er (e t $ill also be per(itted to the e0te t of their i 'est(e t i the pa!*a&e a d assess(e t b# RBI based o pr"de tial or(s% .a-e- ,on-idered* !ases falli & o"tside the p"r'ie$ of the a"to(ati! ro"te li(its a d (at"rit# period (e tio ed earlier% 9"!h !ases falli & " der the Appro'al Ro"te $ill be !o sidered b# a E(po$ered Co((ittee of the RBI%
-= G ENE.%1
%ll4in4,o-t ,eiling-
TE.,* %ND
&ONDITION*A
The prese t all4i 4!ost !eili &s for ECB are as follo$s.
Mat"rit# i) 7 #ears a d "p to E #ears ii) More tha E #ears All4i 4!ots !eili &Q o'er C (o th LIBOR 6FF basis poi ts 7EF basis poi ts
Q All4i 4!ost !eili & i !l"des rate of i terest) other fees a d e0pe ses i forei& !"rre !# e0!ept !o((it(e t fee) prepa#(e t fee) a d fees pa#able i I dia r"pees% Also) pa#(e t of $ithholdi & ta0 is e0!l"ded for !al!"lati & the all4i 4!ost%
END4U9E
Page 3 55
TYBMS
(i)
ECB !a
be raised o l# for i 'est(e t (s"!h as i(port of !apital &oods) of e0isti & prod"!tio " its) i
e$ pro>e!ts)
(oder i?atio 2e0pa sio (ii) Utili?atio
the real se!tor4i d"strial se!tor of shares i the
i !l"di & s(all a d (edi"( e terprises a d i frastr"!t"re se!tor i I dia% of ECB pro!eeds is per(itted i the first sta&e a!1"isitio disi 'est(e ts pro!ess a d i (iii) (i') the (a dator# se!o d sta&e offer to the p"bli! " der the
disi 'est(e ts pro&ra((e of ;9U shares% Utili?atio of ECB pro!eeds is ot per(itted for o 4le di & or i 'est(e t i !apital (ar*et b# !orporates% Utili?atio of ECB pro!eeds is ot per(itted i real estate% ZReal Estate@ e0!l"des de'elop(e t of i te&rated to$ ships as per pro'isio s of ;ress Note No% 7 (6FF6 series) dated 8%5%6FF6 of the D2O I d"strial ;oli!# Y ;ro(otio % (') E d4"ses of ECB for $or*i & !apital) &e eral !orporate p"rpose a d repa#(e t of e0isti & r"pee loa s are ot per(itted%
&=
4 %2,ENT*
;repa#(e t of ECB "p to U9D 5FF (illio is per(itted $itho"t prior appro'al of RBI) s"b>e!t to !o(plia !e $ith stip"lated (i i("( a'era&e (at"rit# period as appli!able for the loa % #efinan,e of exi-ting E.B
Refi a !i & of e0isti & ECB b# raisi & fresh loa s at lo$er !ost is per(itted) s"b>e!t to the !o ditio that the o"tsta di & (at"rit# of the ori&i al loa is (ai tai ed%
E9
1oreign ./rren,0 .on<ertible Bond- 61..B: or(s appli!able to ECB are also e0te ded to +CCB i all respe!ts%
The liberali?atio
So/r,e* +ndia;- External Debt* % Stat/- #e=ort@ )o<ernment of +ndia@ 2!!3%
Page 3 56
TYBMS
T/E +UTURE
<The best $a# to predi!t the f"t"re is to i 'e t it= 4 %lan /ay
Gi'e the s"stai able le'el of !"rre t a!!o" t a d forei& e0!ha &e reser'es i I dia) it is 'er# " li*el# that the forei& e0!ha &e sit"atio be!o(es !riti!al a&ai % It also see(s " li*el# that i ter atio al i 'estors $ill s"bsta tiall# red"!e their e0pos"re) &i'e the stro & f" da(e tals of the I dia e!o o(#% E0ter al debt (a a&e(e t $ill !o ti "e to be a area of hi&h priorit# i the !o te0t of o'erall (a a&e(e t of the I dia e!o o(#% To !o solidate the &ai s alread# (ade) the fo!"s of e0ter al debt (a a&e(e t poli!# sho"ld stress o hi&h &ro$th rate of e0ports) *eepi & the (at"rit# str"!t"re as $ell as the total a(o" t of !o((er!ial debt " der (a a&eable li(its) ti&ht !o trol o short4ter( debt) a d e !o"ra&i & o 4debt !reati & forei& i 'est(e ts flo$s% These !o(bi ed $ith the poli!# efforts ai(ed at a!hie'i & a !o((e s"rate &ro$th i !"rre t re!eipts to ser'i!e the e0isti & debt $ill help retai the s"stai abilit# stat"s i the lo & r" %
Page 3 57
TYBMS
Page 3 58

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TYBMS

External Debt Management

INTRODUCTION TO EXTERNAL DEBT MANAGEMENT

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External Debt Management

EXTERNAL DEBT AND MACROECONOMIC CON9IDERATION9

External Debt Management

There is a relatio ship bet$ee

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External Debt Management

IM;ORTANT A9;ECT9 RELATED TO EXTERNAL DEBT MANAGEMENT

External Debt Management

External Debt Management

e!o o(i! (a a&e(e t% Borro$i &s !a

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External Debt Management

EXTERNAL DEBT 9U9TAINABILITA

External Debt Management

E 0TE.N%1 D E-T * )*T%IN%-I1IT2

External Debt Management

DEBT MANAGEMENT 9TRATEGA4A GLOBAL ODERDIE,

External Debt Management

External Debt Management

External Debt Management

(a*i & forei& ;rote!tio

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External Debt Management

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E"TE#$%& DEBT DE'E&(PME$T %$D M%$%)EME$T

External Debt Management

External Debt Management

B URDEN O+ E XTERNAL D EBT I N I NDIA

External Debt Management

E XTERNAL D EBT M ANAGEMENT ; OLICA

External Debt Management

;ROBLEM9 O+ EXTERNAL DEBT MANAGEMENT IN INDIA

External Debt Management

External Debt Management

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