Management of External Debt in India

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Management of External Debt in India

• Presented by
• Dr Tarun Das
• Economic Adviser
• Ministry of Finance

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Contents

1. Indias position in the world
2. External debt situation
3. Trends for debt sustainability ratios since 1990
4. Legal system and governance
5. Policies and capacity building
6. Lessons from Indian experience

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• 1
• Indias position
• in the world

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1.1 International Comparison of top 10 debtor
countries in 2003
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1.2 International Comparison of top 10 debtor
countries in 2003
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1.3 Indebtedness and Income Group Classification
Severely Indebted Either PV/XGS gt 220 Or PV/GNP gt 80 Low Income PC-GNP less than 765 Middle Income PC-GNP between 766 and 9385
Moderately Indebted Either 132 ltPV/XGSlt 220 or 48 ltPV/GNPlt 80 Low Income PC-GNP less than 765 Middle Income PC-GNP between 766 and 9385
Less Indebted Both PV/XGSlt 132 and PV/GNPlt 48 Low Income PC-GNP less than 765 Middle Income PC-GNP between 766 and 9385

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1.4 International Comparison of top 10 debtor
countries in 2003
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1.5 International Comparison of South Asian
countries in 2003
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• 2
• External Debt Situation
• of India

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2.1 External Debt of India
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2.2 Creditor Composition of External Debt (in per
cent)

Creditors March 1991 March 2005
Multilateral 28 26
Bilateral 32 14
Non-resident Indians 17 26
Others 23 34
Total 100 100
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2.3 Debtor composition of External debt (in per
cent)

Debtors March 1998 March 2005
Government 50 39
Non-government 50 61
-- Financial Sec 22 34
-- Public sector 10 17
-- Private sector 13 4
-- Short-term 5 6
Total 100 100
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2.4 Currency Composition of External Debt

• Currency March 1996
  March 2005
• US dollar 41
  45
• SDR
  15 16
• Indian Rupees 15
  19
• Japanese Yen 14
  11
• Euro
  9 5
• Pound sterling 3
  3
• Others
  3 1
• Total
  100 100
• DM, French Franc, Netherlands Guild
  

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2.5 Contingent External Liability of the Central
Govt
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• 3
• Trends of Debt Sustainability Indicators

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3.1 Significant reduction in External Debt
Service Ratio (at end March) ( of gross current
receipts)
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3.2 Significant reduction in External Debt to GDP
ratio (at the end March)

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3.3 Significant reduction in External Debt to
current receipts ratio (March)

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3.4 Reduction in Concessional to Total External
Debt Ratio (end March)

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3.5 Reduction in Short Term Debt to Total
External Debt Ratio (end March)
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3.6 Reduction in Short Term Debt to Total
Foreign Exch. Ratio (end March)
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3.7 Substantial increase in Foreign Investment
Inflows (US billion)

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• 4
• Legal System
• and Governance
• of Public Debt in India

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4.1. Fiscal Federalism Public Debt

• India has a fiscal federalism with distinct
  powers of Union and state governments.
• As per Indian budgetary practice, Public Debt
  comprises of
• Internal Debt
• External Debt
• Other Liabilities.
• Other Liabilities include provident funds, post
  office and small savings deposits, reserve funds
  etc.

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4.2. Fiscal Federalism Public Debt

• State Governments power to borrow is limited to
  Internal Debt.
• Indian Constitution provides power to Central and
  State Governments to place limits on internal and
  external debt.

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4.3 Laws and Acts for Public Debt

• Management of Public Debt and External Debt in
  India are governed by various Acts.
• Under the provisions of the Reserve Bank of India
  (RBI) Act of 1935, RBI acts as the debt manager
  for the domestic debt of both the Union
  government and state governments.
• The procedures and rules for internal debt
  management are indicated in the Public Debt Act
  of 1944, amended from time to time.
• Limits on Public debt are specified under the
  Fiscal Responsibility and Budget Management
  (FRBM) Act of 2003 and FRBM Rules of 2003.

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4.4 Institutional Arrangement in Management of
Domestic Debt

• Reserve Bank of India acts as the principal debt
  manager for domestic debt of the Central Govt
  with active advice from the Ministry of Finance.
• Institutional Arrangement
• Front Office RBI
• Middle Office Budget Division, MoF
• Back Office Comptroller Auditor General.

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4.5 Institutional arrangement for management of
external debt

• Ministry of Finance plays the key role in close
  association with the RBI.
• - Head Office Finance Minister
• Front Office Fund-Bank, ECB, ADB, EEC, FI/FT,
  Japan Divisions of MOF and RBI
• Middle Office External Debt Management Unit
  (EDMU) in MoF
• Back Office Office of the Controller of Aid
  Accounts and Audit (CAAA).

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4.6 Accountability and Audit

• All expenditures and receipts are subject to
  audit and accounting principles, under Controller
  General of Accounts
• Controller of Aid Accounts and Audit Office for
  external debt.

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4.7 Fiscal Responsibility and Budget Management
(FRBM) Act 2003

• FRBM Act 2003 and FRBM Rules 2004 came into force
  w.e.f. 5 July 2004.
• The Act mandates the Central govt to eliminate
  revenue deficit by March 2009 and to reduce
  fiscal deficit to 3 of GDP by March 2008.
• Under section 7 of the Act, the central govt is
  required to lay before both houses of Parliament
  Medium Term Fiscal Policy Statement, Fiscal
  Policy Strategy Statement and Macro Economic
  Framework Statement along with the Annual
  Financial Statement and Demand for Grants.

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4.8 FRBM Rules 2004

• Reduction of revenue deficit by 0.5 of GDP or
  more every year.
• Reduction of gross fiscal deficit by 0.3 of GDP
  or more every year.
• No assumption of additional debt exceeding 9 of
  GDP for 2004-05 and progressive reduction of this
  limit by at least one percentage point of GDP in
  each subsequent year.

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4.9 FRBM Rules 2004

• No guarantee in excess of 0.5 of GDP in any
  financial year.
• Four fiscal indicators to be projected for the
  medium term. These include revenue deficit,
  fiscal deficit, tax revenue and total debt as
  of GDP.
• Greater transparency in the budgetary process,
  rules, accounting standards and policies having
  bearing on fiscal indicators.
• Quarterly review of the fiscal situation.

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4.10 FRBM Rules 2004

• The rules mandate the Central Government to take
  appropriate collective action in the case of
  revenue and fiscal deficits exceeding 45 of the
  budget estimates, or total non-debt receipts
  falling short of 40 of the budget estimates at
  the end of half year of the financial year.
• The rules also prescribe the formats for the
  mandatory statements.

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4.10 Medium Term Fiscal Indicators
Items 2004-05 RE 2005-06 BE 2006-07 Tar 2007-08 Tar
1.Revenue Deficit as of GDP 2.7 2.7 2.0 1.1
2.Fiscal Deficit as of GDP 4.5 4.3 3.8 3.1
3.Gross tax rev. as of GDP 9.8 10.6 11.1 12.6
4.Year-end debt stock ( of GDP) 68.8 68.6 68.2 67.3
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• 4
• Policies for External Debt Management

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4.1 Management of External Debt

• Cautious and step by step and gradual approach
  towards capital account convertibility.
• Liberalization of non-debt creating financial
  flows (such as FDI and portfolio equity) followed
  by liberalization of long-term and medium term
  debt inflows.
• Partial liberalization of external commercial
  borrowing.

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4.2 Management of External Debt

• Tight control on short term external debt and
  close watch on the size of the current account
  deficit.
• Subnational entities (such as States, local
  governments) are not allowed to borrow directly
  from Fund-Bank, ADB.
• Capital account restrictions for residents and
  modest short-term liabilities helped India to
  insulate from the East Asian economic crisis
  during 1997-2000.

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4.3 Management of Sovereign External Debt

• High share of concessional debt (80 at the end
  of March 2005).
• No government borrowing from external commercial
  sources.
• No short-term external debt by government.
• Maturity of government debt concentrated towards
  long-end for the debt portfolio.

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4.4 Management of Sovereign External Debt

• No tied loans since 2003.
• No external assistance from bilateral countries
  except from Japan, USA, EC and Russian Federation
  since 2003.
• Prepayment of more expensive debt.
• India prepaid 5.9 billion debt to World bank and
  ADB in 2002-2004.
• Bilateral loans amounting to 1.3 billion from
  Sweden, Netherlands, Austria, Australia, Canada,
  Spain, Denmark, Kuwait and Saudi Arabia were
  completely liquidated in 2002-04

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4.5 Indias Views on World Bank Debt Relief
Program of HIPCs

• India fully supports the HIPC program.
• India is the first developing country to join the
  program.
• However, Indias view is that extra resources
  should be generated for the the program and it
  should not be at the cost of resource flows to
  other developing countries.

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4.6 Indias Views on World Bank Debt Relief
Program of HIPCs

• Debt write-off programs should be supplemented by
  credible structural reforms and macro
  stabilization policies for
• Sustainable high growth
• Reduction of fiscal deficit
• Employment generation programs
• Poverty alleviation programs

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• 5
• Monitoring,
• Dissemination and Capacity Building

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5.1 Monitoring of External Debt

• 100 government debt data and 78 of total
  external debt data are computerized on the basis
  of Commonwealth Secretariat DRMS.
• Projects underway to computerise fully NRI
  deposits and short term debt which account for
  the residual 22 of total external debt.
• Historical trends and future projections of debt
  stock and debt services are available for
  analysis, scenario building and as MIS inputs.
• Debt Data updated quarterly for March, June,
  September, December. June 2005 debt data are now
  under compilation .

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5.2 Debt Data Dissemination

• Data by both Creditors and Debtors classification
  are available.
• Data by Currency, maturity and interest mix are
  also available.
• Data cross-classified by institutions and
  instruments are also available.
• Time lag for data update 8 weeks - well below
  the SDDS benchmark of the IMF.
• Status Report on External Debt is presented to
  the Parliament every year. Also posted on the
  MOF homepage (www.nic.in/finmin/miscellaneous).

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5.3 Capacity Building for External Debt Management

• World Bank provided an IDF Grant for
  strengthening external debt management of India.
• Achievement under IDF Grant
• Computerization and common database platform on
  the basis of CSDRMS.
• Debt-Data connectivity established between RBI,
  Office of CCAAA and the EDMU in the MOF.
• Organized 3 international seminars one workshop
  with active participation by the World Bank, RBI,
  Financial Institutes, Commercial banks, corporate
  bodies, investment banks.
• Published three Books on papers proceedings.

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5.4 World Bank IDF Grant

• Projects completed with partial help of IDF
  Grant
• Report on Monitoring of Non-Resident Indian
  Deposits.
• Report on Monitoring of Short-term External Debt.
• Report on Monitoring of non-debt financial flows.
• Report on Measurement of External Sector Related
  Contingent liabilities.
• Building Models on Sovereign External Debt
  Management and External Debt Sustainability.
• Report on Middle Office for Public Debt
• Establishment of the Centre of Excellence for
  training at the CAB, RBI, Pune.

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• 6
• Lessons from Indian Experience

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6.1 Lessons from Indian Experience

• Management of external debt is closely related to
  the management of domestic debt, which in turn
  depends on the management of overall fiscal
  deficit.
• Debt management strategy is an integral part of
  the wider macro economic policies, which act as
  the first line of defense against any external
  financial shocks.
• For an emerging economy, it is better to adopt a
  policy of cautious and gradual movement towards
  capital account convertibility.

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6.2 Lessons from Indian Experience

• At the initial stage, it is better to encourage
  non-debt creating financial flows followed by
  liberalization of long-term debt.
• It is necessary to adopt suitable policies for
  enhancing exports and other current account
  receipts which provide the means for financing
  imports and debt services.
• Detailed data recording and dissemination are
  pre-requisites for an effective management and
  monitoring of external debt and formulation of
  appropriate debt management policies.

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6.3 Lessons from Indian Experience

• Need for Setting up an integrated Public Debt
  Office
• - To deal with both domestic external debt
• - To set bench marks on interest rate, maturity
  mix, currency mix, sources of debt
• - Identification and measurement of contingent
  liabilities
• -- Policy formulation for debt management
• -- Monitoring risk exposures
• - Building Models in ALM framework

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6.4 Lessons from Indian Experience

• It is vital that external forward liabilities and
  short-term debt are kept within prudential
  limits.
• It is important to strengthen public and
  corporate governance and enhance transparency and
  accountability.
• It is also necessary to strengthen the legal,
  regulatory and institutional set up for
  management of both internal and external debt.
• A sound financial system with well developed debt
  and capital market is an integral part of a
  countrys debt management strategy.

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• Thank you
• Have a Good Day