Public Debt Lecture-3 By Tarun Das

Management of External Debt in India Presented by

Dr Tarun Das Economic Adviser Ministry of Finance UNITAR Lecture-3

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Contents 1. India’s 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 UNITAR Lecture-3

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1 India’s position in the world

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1.1 International Comparison of top 10 debtor countries in 2003

C o u n try a n d R a n kTin o ta l e x te rn a l S h a re o f D e b t to G N P te rm s o f sto ck o f debt c o n c e ssio n a l ra tio e x te rn a l d e b t (U S $ b illio nd) e b t (p e r ce n t) (p e r ce n t) 1 . B ra z i l 235 1 30 2 . C h in a 194 17 15 3 . R u ssi a n F e d e ra tio n 1 7 6 1 50 4 . A rg e n tin a 166 1 1 04 5 . T u rk e y 146 4 77 6 . M e x ic o 140 1 23 7 . In d o n e sia 134 27 80 8 . In d ia 114 38 22 9 . P o la n d 95 7 40 1 0 .P h ilip p in e s 63 23 77

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1.2 International Comparison of top 10 debtor countries in 2003

C o u n try a n d R a n k in R a tio o f sh o rt te rm D e b t se rv i c e te rm s o f sto c k o f d e b t to (p e r c e n t) ra ti o e x te rn a l d e b t T o ta l d e b t F o re i g n e x c h . (p e r c e n t) 1 . B ra z i l 8.3 3 9 .8 63.8 2 . C h in a 3 2 .7 1 7 .5 7.3 3 . R u ssi a n F e d e ra tio n 1 7 .6 3 9 .3 11.8 4 . A rg e n ti n a 1 3 .8 1 6 2 .4 37.9 5 . T u rk e y 1 5 .8 6 4 .7 38.5 6 . M e x ic o 6.6 1 5 .5 20.9 7 . In d o n e si a 1 7 .0 6 3 .2 26.0 8 . In d i a 4.2 4.6 18.1 9 . P o la n d 2 0 .5 5 7 .4 25.1 1 0 . P h il ip p in e s 9.9 3 9 .0 22.1

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1.3 Indebtedness and Income Group Classification Low Income: Severely Indebted: Either PV/XGS > 220% Or PV/GNP > 80%

PC-GNP less than $765 Middle Income : PC-GNP between $766 and $9385

Moderately Indebted: Either 132%
Low Income: PC-GNP less than $765

Less Indebted: Both PV/XGS< 132% and PV/GNP< 48%

Low Income: PC-GNP less than $765

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Middle Income : PC-GNP between $766 and $9385

Middle Income : PC-GNP between $766 and $9385 External Debt by Tarun Das

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1.4 International Comparison of top 10 debtor countries in 2003 C o u n tr y a n d P V o f P R a n k in EDT te r m s o f E D T$ B ln 1 . B ra z il 2 5 4 .1 2 . C h in a 1 8 8 .5 3 . R u s s i a n F e d e1 r8 a6 t. i5o n 4 . A r g e n tin a 1 8 4 .2 5 . T u rk e y 1 5 7 .1 6 . M e x ic o 1 5 3 .0 7 . In d o n e sia 1 3 6 .9 8 . In d ia 1 0 0 .3 9 . P o la n d 9 3 .5 1 0 .P h ilip p in e s 6 5 .4 UNITAR Lecture-3

V / G N P V to r a tio e x p o r ts (% ) (% ) 54 323 15 48 117 531 52 135 25 83 81 243 82 200 19 106 48 147 80 147

In d e b te d n e ss a n d in c o m e C la s s i fi c a tio n S e v e re / M id d le L e ss/ M id d le S e v e re / M id d le M o d e r a te / M id d le L e ss / M id d le S e v e re / M id d le S e v e re / M id d le L e ss/ L o w M o d e r a te / M id d le M o d e r a te / M id d le

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1.5 International Comparison of South Asian countries in 2003 Country PV and Rank in of Debt terms of EDT $ Bln 1. I ndia 100.3 2. Pakistan 29.7 3. Bangladesh 12.8 4. Srl Lanka 8.4 5. Nepal 2.1 6. Bhutan 0.4 7. Maldives 0.2

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PV to GNP ratio 19 41 25 51 38 74 35

PV to I ndebtedness XGS and income ratio Classification 106 Less/ Low 189 Moderate/ Low 128 Less/ Low 110 Moderate/ Middle 131 Less / Low 252 Severe/ Low 41 Severe/ Middle

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2 External Debt Situation of India

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2.1 External Debt of India Year End 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05

Total Official Official Conce(US$ Bln) Creditors Debtors ssional (percent) (percent) (percent) 83.8 64 60 46 93.7 64 57 45 101.3 51 43 35 98.4 52 44 36 105.0 48 42 37 111.7 45 40 36 123.3 43 39 34

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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

Nonresident Indians

17

26

Others

23

34

100

100

Total

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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

100

100

Total UNITAR Lecture-3

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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 UNITAR Lecture-3

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2.5 Contingent External Liability of the Central Govt Year As per cent As per cent to 1994 1995 2000 2002 2003 2004 2005

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to GDP 4.3 3.7 1.3 1.5 1.3 1.0 1.0

total external debt 13.1 12.5 7.3 7.1 6.2 5.8 5.5

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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) 40 35

(% of gross current receipts) 3 5 .3 3 0 .2

30 25

2 7 .5

2 5 .4 2 5 .9 2 6 .2

2 3 .0 1 9 .5 1 8 .8

20

1 7 .1 1 6 .2

15 10

1 3 .7

1 6 1 6 .2

6 .1

5

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

19

92

19

19

91

0

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3.2 Significant reduction in External Debt to GDP ratio (at the end March) 3 8 .73 7 .5

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05 20

03 20

01 20

99 19

97 19

95 19

93 19

19

3 3 .8 3 0 .8 2 7 .0 2 4 .62 4 .3 2 3 .6 2 2 .12 2 .62 1 .1 2 0 .2 1 7 .81 7 .4

2 8 .7

91

45 40 35 30 25 20 15 10 5 0

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3.3 Significant reduction in External Debt to current receipts ratio (March) 350

329

312

323

300

276 236

250

189

200

170 160 162

15 0

146

128 122

110

10 0

99 95

50

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05 20

03 20

01 20

99 19

97 19

95 19

93 19

19

91

0

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

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05 20

03 20

01 20

19

99

4 2 .3 3 9 .53 8 .53 8 .9 3 5 .53 6 .03 6 .83 6 .1 3 3 .5

97 19

95 19

19

19

93

4 5 .94 4 .84 4 .54 4 .44 5 .3 4 5

91

50 45 40 35 30 25 20 15 10 5 0

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12 10

3.5 Reduction in Short Term Debt to Total External Debt Ratio (end March) 1 0 .2 8.3

8

7 .2

7 .0

6

5.4 3.9

4

4 .3

6 .1

5.4 4 .4

4 .0

4 .4 3 .6

4

2 .8

2

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

19

92

19

19

91

0

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450

3.6 Reduction in Short Term Debt to Total Foreign Exch. Ratio (end March)

400

382

350 300 250 200 15 0

126

10 0

98

50

24

30

19

15

11

9

5 .4 6 .5 4.1 6 .1

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

30

19

92

19

19

91

0

21

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3.7 Substantial increase in Foreign Investment Inflows (US$ billion) 14

1 2 .5

12

11

in US $ billion

10 8 6 4 .2

4

5 .4

5 .1

5 .9

6 .7 4 .6

2 .3

2 0 .1 0 .1

0 .6

19

90 19 - 9 1 91 19 - 92 92 19 - 9 3 93 19 - 9 4 94 19 -95 95 19 -96 96 19 -97 97 19 - 9 8 98 19 -99 99 20 -00 00 20 - 0 1 01 20 -02 02 20 -03 03 20 -04 04 -0 5

0

5 .1 4 .9

6 .0

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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 Government’s 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. UNITAR Lecture-3

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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 • Reserve Bank of India acts as the principal Debt 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 (CAA&A).

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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. UNITAR Lecture-3

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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 2005- 2006- 2007-08 RE 06 BE 07 Tar Tar 1.Revenue Deficit as 2.7 2.7 2.0 1.1 % of GDP 2.Fiscal Deficit 4.5 4.3 3.8 3.1 as % of GDP 3.Gross tax rev. 9.8 10.6 11.1 12.6 as % of GDP 4.Year-end debt 68.8 68.6 68.2 67.3 stock (% of GDP) UNITAR Lecture-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. UNITAR Lecture-3

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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. UNITAR Lecture-3

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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 UNITAR Lecture-3

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4.5 India’s 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, India’s view is that extra resources should be generated for the the program and it should not be at the cost of resource flows to UNITAR Lecture-3 External Debt by Tarun Das 40 other developing countries.

4.6 India’s 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 UNITAR Lecture-3

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5 Monitoring, Dissemination and Capacity Building UNITAR Lecture-3

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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 Creditors and Debtors • Data by both • • • •

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 CS:DRMS. – Debt-Data connectivity established between RBI, Office of CCAA&A 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. UNITAR Lecture-3

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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. UNITAR Lecture-3

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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 prerequisites for an effective management and monitoring of external debt and formulation of appropriate debt management policies. UNITAR Lecture-3

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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 country’s debt management strategy. UNITAR Lecture-3

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Thank you Have a Good Day

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