Kautilya: So There's Life After Debt

India Today
September 28, 1998

KAUTILYA
So There's Life After Debt

How India has escaped being East Asia--at least thus far

Jairam Ramesh

The burden of external debt has created a severe economic crisis in countries like Indonesia, South Korea, Thailand, Malaysia, Russia, Brazil and Pakistan. But although it is among the top eight indebted countries in the world, India has escaped the contagion. This is largely due to its prudent external debt management strategy -- conceived and implemented by Manmohan Singh and consolidated by P. Chidambaram.

Memories are short. We have forgotten India faced an East Asia-type crisis in 1991. Our short-term debt -- debt which has to be repaid within a year -- had zoomed to 146 per cent of our foreign exchange reserves. Today, this is down to about 25 per cent. In mid-1997, when the East-Asian collapse began, the figure was 206 per cent in South Korea, 170 per cent in Indonesia, 145 per cent in Thailand and 60 per cent in Malaysia.

Singh's external debt management strategy had many facets:

pushing export growth;

phasing out volatile NRI deposit schemes;

monitoring all external commercial borrowings (ECBs);

discouraging foreign loans of maturity less than seven years;

limiting short-term credit to finance trade;

ceasing to ask public-sector companies and financial institutions to borrow abroad on behalf of the government;

facilitating non-debt creating inflows;

a market-determined exchange rate system.

Many top economists and politicians advised P.V. Narasimha Rao, then prime minister, to take the default option and seek debt rescheduling. Rao was momentarily tempted. Fortunately, his finance minister prevailed. Singh's stand was one of both fiscal and moral rectitude.

There were many pressures on Singh and Chidambaram to liberalise ECB approvals. They did so in a measured manner, all along accused of being conservative. Events have vindicated their caution. The high point of debt management was reached in early 1997, when India discharged large repayment obligations amounting to about $2.5 billion without correspondingly increasing its external debt.

Before the 1991 reforms, 95 per cent of foreign exchange inflows created a debt obligation. Today, this is down to 50 per cent. It must decline even faster.

The RBI's recent annual report places our external debt at $94 billion as on March 31, 1998. This is an increase of just $3 billion since 1990-91. It debunks the myth that our foreign exchange reserves have increased by incurring heavy debt obligations. The structure of our debt is different from that of other countries -- half is comprised of debt on concessional terms and rupee debt to Russia. The World Bank adjusts the external debt of all countries to reflect the differences in structure of debt. Its adjusted value of external debt for India is now at about $75 billion.

There are no absolute rules for judging the sustainability of a country's external debt. The debt service ratio -- the proportion of export earnings and remittances consumed by repayments -- is one index. This was 30 per cent in 1990-91, 19 per cent in 1997-98 and is projected to fall to 15 per cent by the turn of the century.

The World Bank uses two indicators of sustainability. The first is the present value of debt. If this exceeds 50 per cent of national income, then the country has to worry. This ratio was 22 per cent for India in 1996, the latest year for which the World Bank has published calculations. Thus, on this score India is a less indebted country.

The second indicator is the value of debt as a percentage of exports. This sends us into the moderately indebted category. The ratio was 152 per cent for India in 1996. Anything below 130 per cent is considered low indebtedness.

China's external debt is 40 per cent more than India's. But it is classified as a low indebted country on both counts. Our basic problem, therefore, is not high external debt per se -- but poor export performance. This has been brought about by policy cobwebs of our own making.

India's external debt statistics are now among the most transparent in the world. Just how transparent they are is revealed by the fact that the Washington-based Institute of International Finance (IIF) puts out its own assessment of our short-term debt. According to it, our short-term debt is a little more than double what the RBI states.

Definitions vary. For example, the RBI calculates short-term debt on the basis of original maturity. The IIF calculates it on the basis of residual maturity. It also includes some NRI deposits that the RBI excludes. Given its influence, it would be prudent not to ignore what the IIF is saying. India too should be accounting for guarantees, contingent liabilities and the full costs of NRI deposits.

Clearly, we have managed our external debt better than most countries. But in a world increasingly governed by sentiment as much as fundamentals, there is the possibility of the external debt knell being sounded again. This may well happen if policy-paralysis continues, if reform-fatigue persists and if we insist on misreading the current global turmoil as a justification for slowing down liberalisation.

The author is secretary of the AICC's Economic Affairs Department. The views expressed here are his own.

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