Debt Management:

An Indian Perspective

Agenda
Nilesh Amit Kapil Rajsekhar Soumitra Rahul

Introduction Governments say on Debt External & Internal Debt Countries comparison RBI steps on Debt US Debt Crisis & Impact

Introduction

By Nilesh Narayanan

Introduction
Public Debt or Government Debt It is the debt incurred by the government in mobilizing savings of the people in the forms of loans, which are to be repaid at a future date with interest. Classical economist like Hume and Adam Smith condemned the concept of public borrowing. It was J.M . Keyenes, the pioneer who brought about a marked change in the economic thinking towards Public borrowing.

What leads to Public borrowing

Government projects outlay in public sector

Central and State government lending to the private sector for investment in planned development projects. Public borrowing to meet the current deficits in budget.

Types of Debt
Classification of Public Debt Internal & External Debts Productive and Unproductive debt Long term and Short term debt

Voluntary or Compulsory debt

Public Debt Management and its Objective

Effective public debt management is the cornerstone of financial stability and sustainable fiscal policy. A government's debt portfolio is often the largest in the country and can generate substantial risk to its balance sheet, with potential to undermine key development objectives.

Public debt management is the process of establishing and implementing a strategy for prudently managing the governments debt in order to meet the governments financing needs, its cost and risk objectives, and any other debt management goals the government may have set.
Ensure the financing needs of the government Minimize the borrowing cost Keep risks at an acceptable level Development and well functioning of the domestic market

Governments say on Debt

By Amit Bijalwan

Government on National Debt

Major Problems Indian economy is your large budget deficit and the resulting high level of national debt The combined central government debt is now close to 75 percent of GDP Large fiscal deficits have a variety of adverse consequences: Reducing economic growth, Lowering real incomes Increasing the risk of financial and economic crises Fiscal deficits can also lead to inflation If India did not have its current central government deficit of some 6 percent of GDP, the gross rate of capital formation could rise form 24 % of GDP to 30%.

Government on National Debt

Indias fundamentals remain strong
Financial sector robust Monetary policy sufficient instruments, flexible Corporate sector not too leveraged second round of restructuring going on productivity gains Foreign direct investment buoyant Agriculture improving Growth domestically financed

Indian economy should be able to recover fast and return to 9%+ growth path

Government on National Debt

While acknowledging that India was impacted, the effort was to play down the likely intensity of that impact. Our institutions are strong and [we] are prepared to address any concern that may arise on account of the present situation, Finance Minister Pranab Mukherjee The government will fast track the implementation of the pending reforms and keep a close eye on international developments.

Government Policies
Adoption of transparent policies to help economic agents better plan their activities and minimize risk and cost.
Policy actions to reflect concerns emerging from the interface between domestic and global economic environment. Conscious build-up of foreign exchange reserves to provide effective insurance against external sector uncertainties Future focus is on building debt sustainability benchmarks for the sovereign external debt by linking with: Domestic debt for fiscal sustainability

Total external debt for BOP sustainability

Contingent external liability for extreme case scenario

Internal & External Debt

By Kapil Mohan Gupta

India GDP Growth

India Debt to GDP ratio

Indias external debt (as %of GDP) 17.3%
30.00% India External Debt (as %of GDP) 25.00%

20.00%

15.00%

10.00%

5.00%

0.00% 2005-06 2006-07 2007-08 2008-09 2009-2010 2010-2011

Changing Composition of Indias External Debt

Creditor Classification of External Debt

Currency Composition

Composition of Short-Term Debt (at end-March 2011)

Principal Repayment and Interest Payment (US$ billion)

India State wise Loan

ANDHRA PRADESH TAMILNADU KARNATAKA MADHYA PRADESH MAHARASHTRA BIHAR UTTAR PRADESH KERALA RAJASTHAN HARYANA WEST BENGAL ORISSA CHHATTISGARH PUNJAB GUJARAT JHARKHAND UTTARAKHAND HIMACHAL GOA JAMMU AND ASSAM MIZORAM TRIPURA MEGHALAYA SIKKIM 0.05 5000.05 10000.05 15000.05

Loan (in INR Millions)

20000.05 Millions

India State wise GDP

Maharashtra Andhra Pradesh Gujarat Karnataka Kerala Madhya Pradesh Punjab Orissa Jharkhand Uttarakhand Jammu & Kashmir Chandigarh Meghalaya Manipur Arunachal Pradesh Andaman and Nicobar Islands Dadra and Nagar Haveli Lakshadweep 0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000 GDP (in USD Millions)

Countries Comparison

By Rajsekhar

External debt management

Top fifteen developing debtor countries

Comparison of external debt positions among BRIC countries

Comparing external debt position with developed countries

External debt to GDP ratio of developing & developed countries

BRIC Countries
Brazil Russia india China 15 USA 33 15 7 UK Germany 400 142 100 Developed Countries

According to the IMF Macro economist prudential norms 40% for developing countries and 60% for developed countries are the benchmark. This limit delineates the point at which fiscal solvency is called into question

Impact of higher external debt

Higher debt raises the probability of defaulting. When lenders stop lending, consumption and investment fall. If the downturn is bad enough, defaults, deficient demand and high unemployment might be the grim result. The higher the level of debt, the bigger the drop for a given size of shock to the economy. And the bigger the drop in aggregate activity, the higher the probability that borrowers will not be able to make payments on their non state-contingent debt. In other words, higher debt raises real volatility, increases financial fragility and reduces average growth

Impact of higher external debt

According to Economists of BIS Every 10 percent of debt-to-GDP, output declines 0.17 percent to 0.18 percent. Put another way, if debt-to-GDP is currently at 100 percent, that means GDP is 1.8 percent lower than it otherwise would be.

RBI Steps on Debt

By Soumitra Mukherjee

Debt Management involves

repayment of public debt, controlling the amount of borrowings and productive use of borrowed funds

(Historical methods of reducing Debt/GDP ratio are through economic growth, fiscal adjustment/austerity, restructuring, financial repression and steady inflation.)

Detailed steps
Reduction in Primary Deficit
a) b) Containing the Debt Ratio (Total Debt/Total Assets) Contain revenue expenditures within the revenues raised by the Government so that Government's net borrowing is used only for productive purposes

Reduction in Growth of current expenditure

1. Reduction in the government's consumption expenditure for its staff (controlled Govt. hiring, use of technology etc) 2. Liquidation of Public Debt (Financial Repression) 3. Reduction in capital Assistance and subsidies to public enterprise (decontrol of Petrol & Urea prices, Diesel pricehike and the pending sugar price decontrol) (http://www.moneycontrol.com/news/brokerage-recos-sectorreport/urea-decontrol-positive-for-chambal-fert-tatachem_580929.html)

Raising efficiency of borrowing Prog. of Central Govt.

a) The Central Government and the Reserve Bank signed an agreement on Ways and Means in March 1997, which discontinued the practice of issuing ad hoc Treasury Bills to replenish the Centres cash balance with effect from April 1, 1997. b) RBI takes into account the cash needs of the government, the liquidity conditions in the market and primary and secondary market yields.

Reforms in Debt Management of States

a) sale of state government loans (security instruments to raise debts) continue to be on old pattern b) it is necessary to bring flexibility in the borrowing programs of the state governments with the help of RBI initiatives.

Foreign institutional Public debt

investors

and

Foreign Institutional Investors have been permitted to invest only in dated government securities. It must be noted however that Indias policy has been to keep the External Debt as low as possible (about 1720% of the total debt)
http://www.moneycontrol.com/news/cnbc-tv18-comments/fmeases-fii-investment-normslong-term-infra-corpbonds_585343.html

Improving the state of debt market

The RBI has taken various measures to widen and deepen the debt market in India. These measures include uniform price auction of 91 days treasury bills, undertaking repos in non-government debt instruments, sale of capital index bonds, etc.

Disinvestment Policy
The government should disinvest public sector units, especially, the non-strategic and sick ones. This will enable the government to raise funds, which can be utilized to repay a part of the public debt. (Disinvestment proceeds for 2010-2011 (stands at Rs2,59,010 million of which Coal India accounts for Rs1,51,990 million. This without including the proceeds from telecom spectrum sales which brought another 80-90 thousand crores into the state coffer).

Proper Monitoring of Expenditure

The Government should make effort, to monitor the use of funds. The wastage of funds should be monitored by Government Authorities.

Debt Management Office (DMO)

Necessity of an independent DMO In emerging markets like India, it would help establish focus, clarity and transparency. Conflict of interest if RBI handles Debt Management. Role of the proposed independent DMO

Internal Debt Management

Managing the public debt of Government of India/ State Governments , regulating & supervising the Primary Dealers System and developing the Government Securities Market involve:
Floatation of Central/State Government Loans; Fixing of limits on Ways and Means advances (WMA) for both Central and State Governments and monitoring the use of these limits on a daily basis; Authorisation, regulation and supervision of the Primary Dealer system; Market development activities like the introduction of new instruments, development of trading platform, clearing and settlement systems and widening of investor base; Facilitating State Governments' investment of their surplus cash balances in Treasury Bills and dated securities under various funds.

External Debt Management

External Debt is a dangerous double-edged tool that can have disastrous effects, as is turning out to be the case with most European countries. But at the same time, countries like Korea and UK are using external debt to good debt in spite of high Debt:GDP ratios.(In fact Debt-Servicing ratio has emerged as a more reliable index of the state of debt of a country.) It has been the commendable hawkish stance of the Govt. and RBI that has helped India avoid the any such threat owing to its conservative strategy regarding external debt, with the exception of the Gulf Crisis of 1991-92. Ever since, the RBI has ensured that external debt has been kept around the 20% mark while ensuring low debt-servicing costs.

US Debt Crisis & Impact

By Rahul Sharma

US Debt Crisis

The US had its debt downgraded by the ratings agency Standard & Poor's last month after narrowly averting a debt default. The debt problem has not gone away, though, and total US debt is expected to overtake GDP, the total amount of goods and services produced in the country, this year.

US Debt Crisis

The federal government is estimated to have spent about $1.6tn (988bn) on its response to the financial crisis, which put a big dent in the public finances. The crisis also meant that the government received less in taxes from companies and individuals hit by the downturn.

US Debt Crisis

Fighting wars in Iraq and Afghanistan has been another big cost for the public finances in the past 10 years, estimated to have cost about $1.25tn so far. Some people also blame President Bush's tax cuts for the level of debt that the US government now finds itself dealing with.

US Debt Crisis

Among the most serious problems since the financial crisis has been rising unemployment, which increases the amount the government has to pay in benefits as well as reducing the tax take. Most disturbingly, there has been zero net job creation in the US since 2000.

US Debt Crisis

More than half of the annual budget is mandatory spending, which would be difficult to cut. Of the discretionary spending, more than half goes on security, which is also hard to reduce. Without tax rises or major economic growth, it would be hard to cut enough to get rid of the deficit.

Indian Stake - 41Billion USD only

US downgrade not unexpected Montek Singh Ahluwalia US downgrade raises concern over continuing turmoil Investors may re-allocate portfolios due to tension India not insulated, but exposure is limited RBI watchful about the impact; Will ensure required steps IT companies most affected due to large exposure Incremental demand in banking & IT to reduce

India consumption driven; Hence, no major threat

Limited exports from India Imports majorly from middle-east & south-east Asia

FMs opinion on US debt