Compared with the share of short-term debt in other developing countries, India has a considerably low dependence on external financing of short-term maturity.

The short-term as a percentage of total debt was 9.9 per cent in 1990 for India as compared with developing countries' average of 17.6 per cent and by 1995 the figure came down to 4.3 per cent for India as compared with 18.3 per cent for developing countries as a whole, the year in which the latest comparable data are available.

Our reserve management strategy does take into consideration the size of short-term debt while deciding the adequacy of foreign exchange reserves. At the end of March 1997, the ratio of short-term debt to the level of reserves stood at a little over 25 per cent signifying our favourable position in terms of facing any external imbalance situation arising on account of the short-term debt liabilities.

Debt-servicing is essentially a function of the size and maturity pattern of debt stock and the effective rate of interest, while the capacity to service the debt depends on the size of current receipts. In India, the proportion of concessional debt has always been high and despite increasing recourse to non-concessional debt flows in the form of commercial borrowings and non-resident deposits since the early eighties, the share of concessional debt continues to be of the order of 45 per cent during the nineties. External debt servicing rose from $1.6 billion in 1980-81 to $14.1 billion in 1996-97, reflecting the increase in the size of debt stock alongside considerable hardening of interest rates of new commitments. During the same period, however, external current receipts which indicate the capacity to service debt increased from $15.6 billion to $55.6 billion. Particularly during the six year period 1990-91 to 1996-97, as against an average increase of 10 per cent in debt servicing, total current receipts exhibited an average growth of about 20 per cent and as a result debt-service ratio came down from 35.3 per cent in 1990-91 to 25.4 per cent in 1996-97.Yet another important aspect is the fact that in many other developing countries, external current payment obligations in terms of dividends is far higher than that of our country. During 1980-81 to 1990-91, when external debt stock rose significantly from $23.5 billion to $83.8 billion, India's foreign exchange reserves declined from $7.4 billion to $5.8 billion. On the contrary, during 1991-92 to 1996-97, when the foreign exchange reserves increased from $5.8 billion to $26.4 billion, the stock of external debt increased at a moderate rate from $85.3 billion to $90.9 billion. In the 1990s, however, due to policy induced restructuring of the capital account, non-debt creating flows took place on an increasing scale as a result of which India's external debt stock showed only a marginal rise.

It is sometimes argued that we should not increase our borrowings when there is a build up of forex reserves, since the return on reserves is less than the cost of debt. But, it must be noted that, the level of reserves satisfies the need for liquidity, offers insulation against unforeseen shocks and acts as a source of comfort to foreign investors. The cost at which ECB is raised has country and other credit risk built into it, which is influenced by a host of factors, including the level of reserves. Hence, the return on reserves and cost of borrowing are not strictly comparable. A comfortable level of reserves could help finer spreads in the external commercial borrowings, and in that sense they are complementary rather than substitutable.

It is also sometimes argued that we should use our external reserves for lending to the commercial sector for export-oriented purposes. Our strategy was to increase the proportion of non-debt flows in our total capital flows. The debt flows were an average of around 97 per cent for the period up to 1991-92, but the proportion has declined, every year since then and is currently around half.

India's short-term debts (less than one year of maturity) have remained less than 10 per cent of total debt. Maturity structure of new commitments to India indicate that for official loans, the average maturity has fallen from about 40 years in 1980 to 24 years in 1995 and for private commercial loans, the decline has been from about 15 years in 1990 to eight years in 1995. Compared with other debtor developing economies, the term structure of the debt flows to India has also been by and large longer.

If a precise statement on our policy towards external commercial borrowings is to made, it would read as follows:

"Consistent with the overriding norms of prudent debt management, the government's policy approach towards commercial borrowing essentially reflects the finance needs of the country in terms of sustainable current account deficit and availability and relative costs of various forms of external capital. Prescribing annual ceilings for commercial borrowings and attaching priority in approvals to sectors such as infrastructure (power, telecommunication, transportation, railways, etc.) capital goods imports, and exports have constituted the basic approach towards policies relating to ECBs. Requiring prior authorisation for foreign borrowing is a prudent way of protecting a country's long-term balance of payments position".

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.