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Debt Trap Controversy in India!
The high level of external debt is a matter of continuous concern for the Government and the policy for the management of the external sector is consciously directed to keep debt burden within prudent level.
The Economic Survey, 1995-96 observed, “The strategy for external debt management being followed by the Government ensures that India’s debt service ratio will gradually decline to comfortable levels. In fact, the growth of India’s external debt has decelerated sharply from 10.5 per cent in 1990-91 to 2.9 per cent in 1993- 94, with a further decline to 0.9 per cent (excluding the increase in debt in US dollar terms due to exchange rate variations) in 1994-95. During the first six months of 1995-96, external debt, in US dollar terms, has declined by about 5.3 per cent over the level at end-March 1995.”
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White Paper:
The Finance Ministry prepared a White paper of India’s External Debt Position which was released on 22nd December, 1995. This report stated that India’s external debt estimated at over 99 billion dollars at the end of March, 1995 was proving to be cause for concern but asserted that the country was not in danger of falling into a debt trap.
The report further stated that till the 1980s external debt was not a major problem, primarily because India had not resorted to much of market and market related external borrowings. This, however, increased in the second half of 1980s and the Balance of Payments (BOP) crisis that the country faced in 1990-91 was, to some extent due to an external debt problem.
The report further stated that in a country where there was a gap between domestic savings and investment and where Foreign Direct Investment was still not significant, some reliance on external borrowings was unavoidable. However, such borrowings must be kept within prudent limits so that the country did not get into a debt trap.
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However, the growing debt was cause for concern because while India’s reliance on external borrowings increased in the later half of the 1980s and later, the concessional component in overall external borrowings showed a declining trend. As a result, India’s overall debt and debt servicing burden increased and the proportion of short-term commercial borrowing have also increased.
The paper, however, assured that despite an increase in external debt, total debt service burden as measured by debt service payments expressed as a percentage of current receipts component of the Balance of Payments, which was a critical indicator, was declining.
Exim Bank Study:
Again, a case study made by the Export-Import (Exim) Bank on India’s external debt position stated that the present level of India’s external debt could become unsustainable in terms of serving it, posing a major challenge to the policy makers. This Exim study reminded the policy makers of 1990-91 situation which demonstrated India’s vulnerability on the external payments front.
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The study highlighted the need for improving the country’s balance of payments and reducing dependence on borrowed funds specially during the 1980s when India will be undergoing structural reforms.
The findings of the study emphasised the need for appropriate policy responses to insulate the economy from external shocks and underscored the importance of exercising fiscal restraint and operating in a strong macroeconomic framework which ensured a stable and realistic exchange rate.
The study projected a grim situation in the context of the estimated debt-service payments of $11 billion per annum that India would have to make on an average during the current Eighth Plan period. In the medium- term, the study stated that there was a need to work out strategies not merely for raising the growth rate but also reducing and financing the current account deficit.
This would rest on three basic tenets like the productive use of borrowed funds, implementation of sound macro-economic policies and prevalence of favourable external environment. The study left that effective management of liability, was essential to produce adequate liquidity, control the level of interest rate and currency risk as also minimise risks arising out of the maturity and interest rate mismatch.
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World Bank Report:
The World Bank in its Annual Report accompanying the 1992-93 World Debt Tables has observed that there exist a debt crisis in India. However, the World Bank has branded India as “moderately indebted country, but at the same time it has also warned India simply by stating categorically that the debt crisis of the country was quite close to being “Severe”.
Again the latest World Bank Debt Tables (1994-95) show that India is the largest debtor nation in South Asia accounting for 60 per cent of the regions outstanding debt. India is the largest recipient of loans from International Development Association (IDA), accounting for close to 30 per cent of outstanding IDA credits. Since 1990, India has also ranked among the top 10 recipients of loans from World Bank.
Thus considering the above position it can be said that India has fallen into the debt trap. Thus immediate care must be taken so that the country can be rescued from such trap in near future. The sign of marginal improvement that is noticed is that the share of debt service as per cent of current account receipt has declined from 35.3 per cent in 1990-91 to 26.6 per cent in 1994-95.
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Thus the high level of external debt has been a matter of concern to the Government. However, the improvement brought about in the balance of payments position of the country has enabled the Government to substantially reduce the growth of additional debt. Thus, during 1994-95 the increase in external debt was just $ 6.34 (U.S.) billion. During the first half of 1995-96 the debt, in fact, declined by about $ 5.2 billion.
Thus for the second time in recent years, there has been an absolute decline in the country’s external debt. As a ratio of GDP, external debt declined from 41 per cent in 1991-92 to 40 per cent in 1992-93 and further declined to 21.9 per cent in 1999-2000.
The share of short-term component in aggregate debt has also been progressively declining and the share accordingly came down from 10.2 per cent at the end of 1990-91 to 4.1, per cent by the end of 1999-2000 and was just 4.6 per cent at the end of September 2000.
This figure compares favourably with figures for countries like Indonesia (23.1 per cent), Brazil (20.5 per cent). Mexico (23.1 per cent) and Turkey (27.3 per cent). Besides, it needs to he emphasised that the share concessional debt to total debt is exceptionally high in India in comparison to other developing countries that are possessing large stocks of external debt.
Considering the level of performance attained by the Indian economy in the external sector, particularly during 1990-91 it reveals that both by the debt-service ratio criterion and the current account deficit in BOP as per cent of GDP, i.e., CAD/GDP criterion, India has entered into the danger zone, reflecting the economy into a “debt trap”.
The share of debt service in total current account receipts rose considerably from 9.3 per cent in 1980-81 to 35.3 per cent in 1990-91. Again the CAD/GDP ratio, the safe limit being 1.6 per cent, has also increased from 1.38 per cent in 1984-85 to 3.67 per cent in 1990-91.
Thus the condition of the economy in the external sector was alarming. But it is only after the adoption of proper policy for the management of the external sector to keep the debt burden within prudent level, the debt-service ratio (as per cent of current receipts) has declined from 35.3 per cent in 1990-91 to 16.0 per cent in 1999-2000.
Similarly, the CAD/GDP ratio has also declined from 3.67 per cent in 1990-91 to 2.06 per cent in 1994-95. But the ratio is still higher than safe limit being 1.6 per cent.
Status Report on India’s External Debt prepared by Finance Ministry (2000):
A status report on India’s External Debt prepared and released by the Finance Ministry, Government of India on 2nd June, 2000 revealed that India’s total external debt touched an alarming $ 99 billion at the end of December, 1999, putting the nation among the top 10 indebted countries of the world.
The report indicated that India’s external debt has shot up $ 4 billion in one year so as to reach the peak level of $ 99 billion attained in March 1995.
The external debt to the gross domestic product (GDP) of the country stood at 22.3 per cent in December 1999 as compared to 24.4 per cent in March 1998. The ratio had peaked the level of 41 per cent in 1992. But in terms of absolute level of debt, India’s position improved from the third largest debtor after Brazil and Mexico in 1991 to ninth in 1998.
The report observed that though the debt position had returned to peak levels of 1995, but the key debt indicators, however, continued to improve making external debt manageable. Out of the total volume of $99 billion external debt, $ 94.34 billion constituted long term debt and the remaining $ 4.67 billion only constituted the short term debt.
The debt service ratio declined from the peak of 35.3 per cent of current receipts in 1990-91 to 18.0 per cent in 1998-99 and then to only 16.0 per cent in 1999-2000. Thus the report observed, “This implies that while more than one-third of the current receipts were needed in 1990-91 to meet .the country’s debt service obligations, less than one-fifth of the same required in 1998-99”.
The report further observed that the ratio of short term to total external debt had declined gradually from the peak level of 10.2 per cent in March 1991 to 4.5 per cent in March 1999, but increased to 4.7 per cent in December 1999 and then again declined to 4.1 per cent in March, 2000.
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