India's current external debt figure of US $99 billion, many argue, is not a worrisome figure. Despite an increase in India's debt stock, there has been considerable improvement in the country's major debt indicators. This is reflected in the overall improvement in the debt scenario of the country.

Although many experts argue that there is a strong positive correlation between external sector debt management and growth, this link seems to be missing in India. Despite India's excellent export performance last year, India still seems to be in the midst of a Balance of Payments (BoP) crisis.

A look into the past
In the Eighties, India's external sector was in very bad shape and the country faced a financial crisis of its own kind. Heavy borrowings to meet its development needs brought the entire country on the verge of a total economic collapse and there was no solution in sight for to finance the country's debt servicing needs.

The nation's credit rating had taken a beating, the trade deficit was high, exports growth was abysmal, foreign aid was not forthcoming and to top it all commercial borrowings were at abnormal levels.

Momentous year
The year 1991 is considered to be a watershed year for the Indian economy with the winds of liberalisation blowing across the sub-continent. Yes, the Indian economy witnessed the initiation of Reforms. Liberalisation saw Indian exports and imports improve. The BoP situation was brought within fathomable levels. Foreign remittances and investments were up which supported India's development needs. Sadly though, over the years this healthy trend has not been maintained. Growth which had picked up started decelerating.Although the government made serious efforts to reverse the downtrend, India faulted in its announced policies.

India is no longer considered the most preferred destination and investors find India's neighbours more attractive to park their funds. Approvals are high but actual foreign direct investments (FDI) are only a trickle.

The private saviour
It is the private sector which has been playing the role of a saviour of sorts meeting most of the nation's development needs. Fixed private investment in terms of share in GDP today stands at around 15 per cent. Public sector investment is a measly eight to nine per cent. So then, since the 90s with the government coffers virtually empty, private investments have been the vital engine for driving the pace of growth and development of India. On the part of the government, it has miserably failed on the disinvestment front.

It was under such dismal conditions that the government quite rightly recognised the precious role played by the private sector and provided all the support possible towards furthering private initiatives.

Consider some of the sops given to the private sector: removal of price distortions, a liberal foreign trade regime, opening up to FDI, and consolidation of capacity of financial system to mobilise international savings and channelising them into productive avenues. All these measures have led to an increased participation by the private sector. For a developing country such as India, this is definitely a healthy sign.

Trends in external aid
Latest data reveal that there is a marked decline in external aid to India. This is because the criteria now is to link fresh commitments by international donors to better and timely utilisation. However, in the case of India, utilisation levels have been on an ebb.

The distinct decrease in concessional aid has resulted in a negative transfer of resources for India which is a matter of great concern for the monetary authorities. With India laying emphasis on developing its social and infrastructure sectors, there is a distinct needs to have a higher percentage of concessional aid.

But, latest World Bank reports have focussed on the aspect of unutilised aid. If India has to make a case for concessional aid, it will have to first streamline projects that have already been granted aid and accelerate the project approval mechanism.

Will India go the SE Asian way?
Fears that India may also go the South East Asian way have been repeatedly brushed aside. This, mainly on two counts: one, the Rupee is not convertible and two, the ratio of India's short-term debt to total external debt is less than 10 per cent. In comparison, the ratio for Thailand is 41.4 per cent, for Indonesia 25.0 per cent and for Malaysia 27.8 per cent. Excess reliance on short-term debt was the undoing of these nations.

When such debt was not rolled over, these countries were plunged into a protracted liquidity crisis, triggering a solvency crisis from which they are yet to recover.

In many ways, the South East Asian crisis is history repeating itself. The Latin American debt crisis of 1982 and the Mexican crisis of December 1994 were both precipitated by the short maturity structure of external debt factor. Each of these crisis are a crucial reminder of the importance of the maturity structure of external liabilities.

Today, countries depending heavily on modern international finance rely excessively on short-term debt. But, on this front India is very safe as India's percentage of short-term debt to total debt is only around 9-10 per cent. India's forex reserves of around US $40 billion are also substantial enough to finance its external debt commitments.

Debt calculation
India does not follow the international norm for calculating short-term debt. It adopts the original maturity formula instead of residual maturity. Even the World Bank adopts this criterion but treats all debt with an original maturity of one year or less as short-term debt. We take only those with an original maturity of less than one year. The net result: our published ratio of short-term debt underestimates the true extent of our short-term indebtedness.

But even such underestimation is not very alarming. According to the Bank for International Settlements (BIS), the ratio is little over seven per cent and the Institute of International Finance places it a little higher at 12-14 per cent. There exists a serious danger in underestimating our debt liability to the outside world. To quote from the BIS Report: “An otherwise solvent economy as reflected in its debt by original maturity may suffer a serious illiquidity problem when its debt servicing burden exceeds its stock of exchange reserves and its ability to contract new debt or extend old debt."

The result is that in the event of a shift in market sentiment, the country might well experience a debt crisis which may not be signalled in the standard measure of debt sustainability especially in the context of short-term debt.

Hidden threat
Thus, the seriousness of the problem cannot be gauged because of the absence of a measuring rod. Although actual debt may have remained stable, appreciation in the value of the US $ has resulted in the total stock looking inflated. If the US $ were to depreciate during this period the magnitude of debt would have been much higher. On the other hand, the level of debt would be much higher if it was valued in terms of other foreign currencies.

As exports are sluggish and there is some decline in the net surplus on account of invisibles, the larger current account deficit will have to be financed through increased borrowings which will reflect only an increase in outstanding debt. Otherwise, the deficit will lead to a decline in the nation's foreign exchange reserves.

The SBI Resurgent India Bonds whose proceeds inflated the forex kitty by US $4.1 billion increased external debt to that extent also. Despite all the liberalisation measures, the government has not been able to control debt. Failure to attract portfolio investments in equity and FDI and the failure to achieve the export targets speak about the government's inability to contain the ballooning debt. What the government has done is to impose annual caps on ECBs.

No dire consequences
Whatever maybe the external sector forecasts, the debt indicators have been improving. The debt service ratio and debt to GDP ratio have been falling. The reliability ratio has registered consistent improvements over the years since 1994-95. The ratio has declined from 26 per cent in 1994-95 to less than 19 per cent in 1998-99. This ratio is a better indicator of a country's external debt solvency and sustainability level. This parameter takes into account the interest payments, payments of profit and dividend with current receipts.

Not only do these parameters indicate that the country's external solvency is sustainable but they also point out that share of private debt has increased even the share of government borrowings to total external debt has declined. This is heartening news. The strategy then seems to be granting an enhanced role for the private sector.

ECB norms eased
In line with giving a leeway to the private players, the government has liberalised the external commercial borrowing (ECB) norms. Indian corporate houses, specifically exporters can now make ECBs as much as US $ 200 million. The limit has then been raised from US $100 million.

For ECBs with a maturity period of 16 years, the stipulated limit has been increased from the earlier US $200 million to US $400 million. The government's thrust on higher ECBs is because the lifeline infrastructure sector of the country is starved of funds. The sector urgently requires huge foreign investments to be pumped in.

The finance minister has announced that the new rates would apply immediately to bonds, securities, floating rate notes and all other instruments. Plainly, the government has left no stone unturned to attract investment into the much needed infrastructure projects.

The government's announcement of a National Highway Policy requires a massive investment of Rs 20,000 crore or else it will remain a mere dream. And the reality is much too frightening. India is sustaining on fragile infrastructure. It is common knowledge that India's infrastructure is bursting at its seams. Indian roads are overcrowded, ports are choking in capacity and as we head into the new millennium India will be crippled by a 35 per cent shortage of peaking power.

Such adverse conditions have then compelled the government to usher in a conducive environment for foreign investors to aggressively invest in the country. Earlier, a protectionist economy bogged down by several procedural hurdles, red tapism and highhandedness by government officials left the foreign investors embittered. The government has then rightly opened the gates for ECBs. Interest rates have also been drastically lowered resulting in domestic borrowings becoming cheap.