The finance minister does not seem to be very concerned about the country’s external debt situation. He seems to be more concerned about fiscal deficit. Your comments?
Yes, you are right. There is a greater degree of concern being expressed by the finance minister about the fiscal deficit of the country than external debt. But it may not be correct to perceive that there is a deliberate attempt to emphasise the problem of external debt management. Indeed, the build-up of external debt mirrors to some extent the growing fiscal deficit. Erosion in the savings potential of the economy due to a high fiscal deficit and the consequential gap between resources mobilised internally and the requirement of domestic investments makes it imperative to have an increased reliance on external capital. We have been accessing external capital from various sources: foreign direct investments, inflow of portfolio investments and external assistance and commercial borrowings.

Undoubtedly, prudent management of external debt is as crucial as managing fiscal deficit. However, one must also recognise the volumetric difference in internal debt, built up over the years through fiscal mismanagement and external debt. Every year, we have been running huge fiscal deficits both at the centre and the states aggregating to nine to ten per cent of the GDP. In comparison, the annual net accretion to foreign debt is modest. Consequently, as of March 2000, our internal public debt was high as Rs 7,28,627 crore. And if we add various other internal liabilities, the net total internal debt works out to over Rs 9,72,840 crore. This covers only the central government. Now contrast this with the total external debt of US $99 billion which is about Rs 4,41,500 crore based on the current exchange rate of the dollar, as of December 1999.

Let us analyse the problem based on some other relevant parameters as well. The ratio of external debt stock to GDP has progressively declined from 41 per cent as of March 1992 to 22.3 per cent in 1999-2000. Likewise, the debt service ratio has declined from 30.2 per cent to 18.2 per cent over the same period. In contrast, the ratio of total internal debt to GDP has increased from 46 per cent to 50 per cent during this period. Revised estimates in the current budget indicate the aggregate of debt servicing at Rs 2,06,630 crore, including interest payments of Rs 91,425 crore, for 1999-2000. Indeed, the ratio of interest payments to revenue receipts worked out to 51 per cent in 1999-2000. Threat of internal debt trap is clearly in evidence. It is in this context that fiscal deficit management assumes greater urgency than tackling the problem of external debt. This, however, does not mean that the government can afford to be complacent about the size of the external debt as well as its servicing over themedium-term.

The finance minister has put India’s external debt at US $99 billion. How will the government cope with this payment?
Taking the various parameters into account, the US $99 billion stock of external debt is not enormous and worrisome in the short-term period. Payment on account of external debt servicing is also expected to decline, albeit modestly, to US $8.72 billion in the current year from US $9.14 billion in 1999-2000. For the nation as a whole, generating this volume of debt-servicing from exports will not be difficult.

There are many other countries whose external debt is even more staggering. For example, total debt stock of Brazil was US $232 billion in 1998, which works out to over 30 per cent of its GNP and its debt service ratio is 74 per cent. Likewise, Indonesia has a total external debt stock of US $151 billion and its ratio to GNP is over 176 per cent. Indonesia’s debt servicing ratio is as high as 33 per cent. Consider South Korea, whose total debt stock is US $139 billion and its ratio to GNP is 44 per cent. And South Korea’s debt service ratio is relatively modest at 12.9 per cent.

Mexico and China too have very high external debts. What is crucial is to relate the problem of external debt to various key parameters such as the size of GNP or GDP, exports, foreign exchange earnings and the quality of debt. So, as long as external borrowings or capital inflows are used for building up capital assets promising a stream of goods and services at competitive costs, dependence on external debt cannot be harmful to the economy.

Most of India’s debt is dollar-denominated. With the Rupee depreciating, how will the government tackle the problem?
It is true that a large part of India's debt is dollar-denominated and consequently any depreciation of the Rupee imposes an additional burden on the budgetary resources. However, we have to evaluate this problem in relative terms. No one is envisaging Rupee depreciation beyond, say, 4.5 to five per cent in the current year. Additional burden on this account can be absorbed within the existing structure of the government revenues. If, however, due to unanticipated external shocks, the Rupee does drift sizably, say by 12 to 15 per cent, which is unlikely, then such a Rupee depreciation will impinge heavily on the management of external debt-servicing.

The government has committed to pay off a major part of the debt in the coming year. How does the government propose to source the required funds?
There are no extraordinary commitments on the part of the government to repay its debt in the coming year. The total external debt servicing payment, as mentioned earlier, is just about US $ 8.72 billion in 2000-01, that is about 17 per cent of the total projected exports and other invisible earnings.

Further, if one were to closely examine the budget estimates concerning repayment commitments of the central government on account of external assistance, the proposed figure is Rs 9,173 crore. At the same time, gross receipts from external assistance would be Rs 9,121 crore.

In effect, entire receipts will be used for scheduling repayment of past debt with a negative net contribution of Rs 44 crore in the current year.

Even so, there will be no major constraints in the repayment of debt, given the government's budgetary position and India's overall current account receipts on balance of payments. And India has never defaulted. Hence, sourcing funds for repayment of the external debt will not be a difficult task.

Where is a major part of the debt flowing into? Is it contributing to growth?
It is difficult to precisely track the deployment of external debt flows. However, what needs to be recognised is that out of the total debt built over the years, as much as US $49.6 billion is by way of bilateral and multilateral assistance.

Almost these funds entirely might have flown into various sanctioned industrial and infrastructure projects. Besides, there are several other sources of external debt. For instance, the trade deficit at US $6.7 billion has remained virtually stagnant for the past two to three years.

Likewise, NRI deposits of about US $16 billion could have been either utilised for consumption expenditure or by the banking sector for their usual investments in government securities or commercial loans and advances.

During the last few years, there has been a significant expansion of external commercial credit from US $11.7 billion in 1992 to almost US $20 billion by December 1999. And, much of this has been driven by private sector commercial and investment activities. From this data, it is very difficult to draw any definitive conclusions about how productively and efficiently these capital inflows have been deployed.

Nevertheless, external debt has played a catalysing role in India's growth of industry and infrastructure and has driven its overall performance.

With international interest rates rising, why is the government delaying the issue of repayment?
It is true that in recent months there has been a rising trend in international interest rates. But, there are no indications of the Indian Government deliberately trying to delay its scheduled repayment programmes. Having said this, in a regime of rising interest rates, if there is a genuine need for resources, both domestic as well as external, the government would be tempted to defer repayment of previous softer loans.

This is so because this helps in better management of the stock of funds in times of rising interest rates. But, there is no evidence of this happening as a part of any deliberate strategy so far.