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Research Report

Abhishek Patil (2013F01)
Adarsh Sinha (2013F02)
Llyod Dsouza (2013F03)
Omkar Ambekar (2013F04)

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Indias Historic Wealth
What is External Debt?
Overview of Indias External
Analysis of Indias External
Key Reasons for External
Future Trend
Recommended Actions for

Page Number
2 -3
6- 8

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Indias Historic Wealth:

Whenever the issue of economic exploitation and the drain of wealth during
the 200 years of British colonial rule comes up, the one rebuttal from western
historians is that there is scant evidence to prove it. To bolster the argument, the
point is then made that Indian historians are nationalist, biased (sometimes as a
consequence) and do not pay attention to figures and statistical evidence.
In their recent research on deindustrialization in India [ii], Profs Williamson and
Clingingsmith mention that while the maximum revenue extracted by the
Mughals as high as 40%, this paled in comparison to the effective tax rate in the
early years of colonial rule: as central Mughal authority waned, the state
resorted increasingly to revenue farming(raising) the effective rent share to
50% or more
Further, There is no reason to believe that when the British became rulers of the
successor states the revenue burden declined .
After initial attempts at revenue farming, Company officials aggressively
introduced new taxes in an attempt to reduce their dependence on agrarian
production, thus worsening the tax burden on the common man.
To comprehend the extent of unfair trade norms, just one example would
suffice (excerpted from this excellent essay: The Colonial Legacy - Myths and
Popular Beliefs[iv])
As early as 1812, an East India Company Report had stated "The importance of
that immense empire to this country is rather to be estimated by the great
annual addition it makes to the wealth and capital of the Kingdom....."
Few would doubt that Indo-British trade may have been unfair - but it may be
noteworthy to see how unfair. In the early 1800s imports of Indian cotton and silk
goods faced duties of 70-80%. British imports faced duties of 2-4%!
However, the high taxes, the heavy burden of state, the neglect of education and
public works and unfair trade practices these were only the tip of the iceberg.
The most damning evidence of British exploitation was the irrefutable drain of
wealth that took place over the period of two centuries.

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Prof. Williamson and Clingingsmith have noted that between 1772 and 1815
there was a huge net financial transfer from India to Britain in the form of Indian
goods. The drain resulting from contact with the West was the excess of
exports from India for which there was no equivalent import included a
bewildering variety of cotton goods for re-export or domestic [consumption], and
the superior grade of saltpeter that gave British cannon an edge
Javier Cuenca Esteban estimates these net financial transfers from India to
Britain reached a peak of 1,014,000 annually in 1784-1792 before declining to
477,000 in 1808-1815 .
However even this high figures are significantly lower than the estimates by Prof
John Richards (cited later in this essay). Like all other commentators, Maddison
too has mentioned the debilitating effect of the drain of funds from
India: Another important effect of foreign rule on the long-run growth potential
of the economy was the fact that a large part of its potential savings were
siphoned abroad.
This 'drain' of funds from India to the UK has been a point of major controversy
between Indian nationalist historians and defenders of the British raj. However,
the only real grounds for controversy are statistical. There can be no denial that
there was a substantial outflow which lasted for 190 years. If these funds had
been invested in India they could have made a significant contribution to raising
income levels.
In short they looted an Indian's self image, self-reliance and mutual trust and
respect which continues to this day and can be considered the biggest intangible
yet costliest loot.
Now coming to the point of how much was "Looted". The estimates vary from as
low as around 100,000 pounds every annum during Mughal times to 35 Million
pounds or so by Dadabhai Nauroji. Till the battle of Plassey, India of course had a
big trade surplus with the World who had nothing to offer except gold in
exchange for textiles, silk and spices. But once the British won the battle of
Plassey, the great loot of Bengal started and they had a monopoly on trade and
basically funded everything from their industrial revolution to high taxes for
British goods in America to the World wars Britain fought successfully. Basically
in 200 years of British rule India was transformed from one of the World's
wealthiest nation (along with China controlled World's 70-80% GDP for past 20 or
so centuries) to one of the poorest.

Poverty in India:
Poverty in India is widespread, with the nation estimated to have a third of the
world's poor. In 2010, the World Bank reported that 32.7% of all people in India

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fall below the international poverty line of US$ 1.25 per day (PPP) while 68.7%
live on less than US$ 2 per day.
According to 2010 data from the United Nations Development Programme, an
estimated 29.8% of Indians live below the country's national poverty line. A 2010
report by the Oxford Poverty and Human Development Initiative (OPHI) states
that 8 Indian states have 421 million poor people more poor people than SubSaharan Africa. A 2013 UN report stated that a third of the worlds poorest people
live in India.
The latest UNICEF data shows that one in three malnourished children worldwide
are found in India, whilst 42% of the nation's children under five years of age are
underweight. It also shows that a total of 58% of children under five surveyed
were stunted. Rohini Mukherjee, of the Naandi foundation one of the NGOs that
published the report stated India is "doing worse than sub-Saharan Africa.

External Debt
External debt (or foreign debt) is that part of the total debt in a country that is
owed to creditors outside the country. The debtors can be the government,
corporations or citizens of that country. The debt includes money owed to private
commercial banks, other governments, or international financial institutions such
as the International Monetary Fund (IMF) and World Bank.
PEP defines it as "Gross external debt, at any given time, is the outstanding
amount of those actual current, and not contingent, liabilities that require
payment(s) of principal and/or interest by the debtor at some point(s) in the
future and that are owed to nonresidents by residents of an economy"
In this definition, IMF defines the key elements as follows:
Outstanding and Actual Current Liabilities
For this purpose, the decisive consideration is whether a creditor owns a claim on
the debtor. Here debt liabilities include arrears of both principal and interest.
Principal and Interest
When this cost is paid periodically, as commonly occurs, it is known as an
interest payment. All other payments of economic value by the debtor to the
creditor that reduce the principal amount outstanding are known as principal
payments. However, the definition of external debt does not distinguish between
whether the payments that are required are principal or interest, or both. Also,
the definition does not specify that the timing of the future payments of principal
and/or interest need be known for a liability to be classified as debt.
To qualify as external debt, the debt liabilities must be owed by a resident to a
nonresident. Residence is determined by where the debtor and creditor have

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their centers of economic interesttypically, where they are ordinarily located

and not by their nationality.
Current and Not Contingent
Contingent liabilities are not included in the definition of external debt. These are
defined as arrangements under which one or more conditions must be fulfilled
before a financial transaction takes place. However, from the viewpoint of
understanding vulnerability, there is analytical interest in the potential impact of
contingent liabilities on an economy and on particular institutional sectors, such
as government.
Generally external debt is classified into four heads:
(1) public and publicly guaranteed debt;
(2) private non-guaranteed credits;
(3) central bank deposits; and
(4) loans due to the IMF.
Indicators of external debt sustainability[edit]

There are various indicators for determining a sustainable level of external debt.
While each has its own advantage and peculiarity to deal with particular
situations, there is no unanimous opinion amongst economists as to one sole
indicator. These indicators are primarily in the nature of ratios i.e. comparison
between two heads and the relation thereon and thus facilitate the policy makers
in their external debt management exercise. These indicators can be thought of
as measures of the countrys solvency in that they consider the stock of debt
at certain time in relation to the countrys ability to generate resources to repay
the outstanding balance.
Examples of debt burden indicators include the
(a) debt to GDP ratio,
(b) foreign debt to exports ratio,
(c) government debt to current fiscal revenue ratio etc.
This set of indicators also covers the structure of the outstanding debt including
(d) share of foreign debt,
(e) short-term debt, and

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(f) concessional debt in the total debt stock.[7]

A second set of indicators focuses on the short-term liquidity requirements of the
country with respect to its debt service obligations. These indicators are not only
useful early-warning signs of debt service problems, but also highlight the impact
of the inter-temporal trade-offs arising from past borrowing decisions. Examples
of liquidity monitoring indicators include the
(a) debt service to GDP ratio,
(b) foreign debt service to exports ratio,
(c) government debt service to current fiscal revenue ratio etc.
The final indicators are more forward looking as they point out how the debt
burden will evolve over time, given the current stock of data and average
interest rate. The dynamic ratios show how the debt burden ratios would change
in the absence of repayments or new disbursements, indicating the stability of
the debt burden. An example of a dynamic ratio is the ratio of the average
interest rate on outstanding debt to the growth rate of nominal GDP

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Ratio of external debt to GDP, by country

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1.1 Indias external debt stock stood at US$ 390.0 billion at end-March 2013
as against the
end-March 2012 level of US$ 345.5 billion. The increase in external debt was
primarily on account ofrise in short-term trade credit, commercial borrowings,
and non-resident Indian deposits. The growth inexternal debt was 12.9 per
cent at end-March 2013 broadly the same as at end-March 2012.
However,the external debt-GDP ratio rose to 21.2 per cent at end-March
2013, as against 19.7 per cent at end-March 2012, reflecting mainly the
depreciation of the rupee that led to a marginal contraction in thenominal
GDP in US dollar terms.
1.2 The composition of Indias external debt is undergoing a change with the
share ofmultilateral and bilateral debt in total external debt rapidly
diminishing over the years, while that ofcommercial borrowings and NRI
deposits rising. At end-March 2013, the share of commercial
borrowings in total external debt stock stood at 31.0 per cent, followed by
short-term debt1 (24.8 percent), NRI deposits (18.2 per cent) and multilateral
debt (13.2 per cent).
1.3 The maturity profile of Indias external debt indicates dominance of longtermborrowings. At end-March 2013, the long-term debt accounted for 75.2
per cent of total external debt,while the remaining was short-term debt. The
long-term debt at US$ 293.4 billion at end-March 2013
reflected an increase of 9.7 per cent, while the short-term debt at US$ 96.7
billion increased by 23.7 percent over the level of end-March 2012.
1.4 Government (Sovereign) external debt at end-March 2013 stood at US$
81.7 billionvis-a-vis US$ 81.9 billion at end-March 2012. The share of
Government external debt in total externaldebt has declined over the years.
Government external debt accounted for 20.9 per cent of the totalexternal
debt at end-March 2013 as against 23.7 per cent at end-March 2012.
1.5 The currency composition of Indias external debt shows continued
dominance of USdollar, accounting for 57.2 per cent of total external debt at
end-March 2013. This is followed by theIndian rupee (24.0 per cent), SDR (7.5
per cent) and Japanese yen (6.3 per cent). The rupee denominateddebt
comprises outstanding state credits extended to India by the erstwhile Union
of Soviet SocialistRepublic (USSR), rupee denominated NRI deposits, Foreign
Institutional Investors (FII) investmentsin Government Treasury Bills/dated
securities and corporate debt securities.
1.6 The valuation effect reflecting the appreciation of US dollar in the
international marketmoderated the increase in Indias external debt.
Excluding the valuation effect, the stock of external debtat end-March 2013
would have increased by US$ 55.8 billion over the level at end-March 2012.

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Stock of External Debt

2.1.1 India external debt stock in US dollar terms stood at US$ 390.0 billion
at end-March
2013 vis--vis US$ 345.5 billion at end-March 2012, recording an increase of
12.9 per cent broadly thesame level as at end-March 2012. While in rupee
terms, nominal GDP grew by 11.7 per cent, in dollarterms there was a
contraction of 1.7 per cent. As a consequence, the external debt to GDP ratio
rosefrom 19.7 per cent at end-March 2012 to 21.2 per cent at end-March
2013. In rupee terms, external debtstood at ` 2,119,620 crore, reflecting a
rise of ` 3,53,563 crore (20.0 per cent) over the end-March 2012estimate of `
1,766,057 crore (Table 2.1). The increase in external debt stock was primarily
led byhigher short-term trade credit, commercial borrowings and NRI
deposits. Indias external debt to GDPratio has declined significantly since the
early 1990s (Figure 2.1). Though the share of short term debthas increased in
recent years (partly due to an increase in coverage from 2005-06 onwards),
Indiasexternal debt continues to be dominated by borrowings of longer
maturity (Figure 2.2 and Table 2.2).

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Borrower Classification

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The borrower classification of Indias external debt provides break-up into

Government(Sovereign) and non-Government debt (Table 2.6 and Annex VII).
The latter is further categorized intofinancial sector and non-financial public
and private sectors. Non-Government debt as a proportion oftotal external
debt has increased from 71.4 per cent at end-March 2007 to 79.1 per cent
atend-March 2013
With the rising share of non-Government debt, the composition of such debt
assumesimportance. As is evident from Table 2.6, the exposure of the
financial sector and the non-financialprivate sector to external sources of
finance is larger compared to that of the non-financial public sector

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Concessional Debt
Concessionality of external debt indicates softer terms of a loan in relation to
market conditions. Concessionality could be reflected in terms of lower rate of
interest, longer grace orrepayment periods and is measured by the difference
between the face value of a credit and the sum ofthe discounted future debt
service payments.
Different multilateral institutions follow different norms for classifying credits
intoconcessional and non-concessional. In India, loans from International
Development Association (IDA),International Fund for Agricultural
Development (IFAD), Rupee debt are categorized as concessional.The
proportion of concessional loans in total external debt has declined steadily
from 23.0 per cent in2007 to 11.7 per cent at end-March 2013 (Figures 2.9
and 2.10 and Table 2.11). The decline in the shareof concessional debt
reflects the declining share of multilateral and bilateral debt in Indias total

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Trends in Indias Debt Service Payments

Indias external debt service payments and debt service ratio in 2012-13
have shown a
decline (Figure 3.1). Gross debt service payments stood at US$ 31.3 billion
during 2012-13, marginallylower than US$ 31.5 billion in the previous year.
Principal repayments accounted for 65.1 per cent in theIndias total debt
service payments in 2012-13, while the rest 34.9 per cent was on account of
interestpayments. Debt service ratio is estimated at 5.9 per cent in 2012-13
vis-a-vis 6.0 per cent in 2011-12.The decline in debt service ratio in 2012-13
as compared to previous year was due to relatively lowerrepayments of
external commercial borrowings in 2012-13 than the previous year.

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Projections of Debt Service Payments

Debt service projections based on long-term debt outstanding at the end of
March 2013
show that debt service payments would reach a high of US$ 26.0 billion (US$
22.3 billion principalrepayment and US$ 3.8 billion interest) in 2015-16 (Table
3.5 and Figure 3.4). The large debt servicepayments are primarily on account
of higher repayments of ECBs. The repayment of NRI deposits andFII
investment in debt securities are not included in the projections

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External Debt of Top Twenty Developing Debtor Countries

In 2011, external debt of top twenty developing debtor countries together
stoodat US$ 4,001.2 billion, accounting for 82.1 per cent of total external
debt of US$ 4,876.0billion of all 128 developing countries. Among the top
twenty debtor countries, the externaldebt stock of one country (Argentina)
showed decline, while the external debt of othercountries recorded increase
between 2000 and 2011. Sharp increases were noticed in theexternal debt
stock of Romania (1053.1 per cent), Ukraine (867.2 per cent) and
Kazakhstan(865.4 per cent). China and India recorded an increase of 370.6
per cent and 230.6 per cent,respectively in total external debt during the
period 2000-2011 (Figure 4.6).
Indias position was fourth in terms of absolute external debt stock, after
China, Russian
Federation and Brazil in 2011. In terms of external debt stock to GNI ratios,
Indias position (18.3 percent) was the third lowest among the top twenty
debtor countries of the developing world with Chinahaving the lowest ratio of
9.4 per cent. The cover of reserves for external debt across the countries
remained in the ranges of14.6 per cent (Venezuela) to 467.3 per cent (China)
among the top twenty developing debtor countries in2011. In terms of the
cover of external debt provided by the reserves, Indias position was
seventhhighest at 81.1 per cent. The ratio of short-term to total debt ranged
between 4.2 per cent (Pakistan) to69.6 per cent (China) (Figure 4.7). Indias
position at 23.3 per cent was the fourteenth lowest. Theseestimates may not
however be entirely comparable due to differences in coverage.

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Debt Composition:
The composition of multilateral and bilateral sovereign debt at endMarch2013 is presented in the Figures 5.4 and 5.5. International
Development Association(IDA) accounts for the bulk (59.9 per cent), followed
by the International Bank forReconstruction and Development (IBRD, 20.5 per
cent), the Asian Development Bank(ADB, 18.8 per cent), the International
Fund for Agricultural Development (IFAD, 0.8per cent) and Others (0.1 per
cent). In the bilateral sovereign debt, a substantial portionis accounted by
Japan (75.9 per cent), followed by Germany (14.4 per cent), Russia (6.6per
cent) and France (1.6 per cent) and United States (1.5 per cent) (Figure 5.5).
The composition of the countrys multilateral sovereign debt is
undergoingchanges over the years. The share of IDA in total multilateral
sovereign debt hasdecreased from around 73.3 per cent in 2008 to 59.9 per
cent at end-March 2013, whilethat of IBRD increased from 16.5 per cent to
20.5 per cent over the same period. Theshare of ADB also increased to 18.8
per cent at end-March 2013 from 10.1 per cent atend-March 2008

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Currency Composition:
The currency composition indicates that SDR continues to remain the
predominantcurrency in sovereign external debt, primarily due to borrowings
from IDA. The share of SDRstood at 36.0 per cent, (Table 5.2) followed by the
US dollar (26.3 per cent), Indian rupee (17.7per cent), Japanese yen (16.5 per
cent) and the Euro (3.5 per cent) at end-March 2013 . This in conjunction with
the earlier composition at end-March 2008 reflects some shifts(Figure 5.6 and

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Key Reasons for External Debt

The Debt Trap
Indias external debt was a little just over $100 billion in 2004; by March 2013,
this had grown to $390 billion. More worryingly, the short term debt payable
within a year, an indicator of immediate vulnerability, has ballooned to $172
billion in 2013, from $54 billion in 2008. Consequently, India has to pay back
$172 billion to foreign lenders by March 2014. This is nearly 60 per cent of its
current foreign exchange reserves. In normal circumstances, this commitment
would not appear so daunting but then circumstances are anything but normal.
First, the reason India has accumulated such a huge short term debt stock is that
cheap money at virtually zero interest rate was supplied in abundance by
western central banks, especially the U.S. Federal Reserve, post 2008. Of course,
the developed world followed an easy liquidity policy to save their own
economies, threatened by the worst recession since the Great Depression. But
many emerging market economies ended up walking into what can only be
described as a cheap money trap.

But such cheap money has made many emerging economies complacent about
receiving inward capital flows without creating the necessary policy framework to
strengthen the sinews of their domestic industry. In the four years after 2008,
Indias own experience has been one of losing its export competitiveness relative
to other developing countries. This has decelerated our export earnings. Added
to this is our mounting import bill, largely led by rising oil prices. The massive
increase in gold imports further added to our woes. The double whammy of
decelerating exports and rising imports has resulted in India becoming one of the
highest current account deficit nations, at nearly 5 per cent of GDP annually.
India needs at least $90 billion of fresh capital inflows a year to meet its current
account deficit. It could become particularly vulnerable if the U.S. Federal
Reserve decides to partially roll back its cheap money policy in the months
ahead. Cheap global money, which had enabled Indian corporates and financial
institutions to accumulate more and more debt, will certainly not continue for
long. India must begin to prepare for such a contingency. The only way out of this
predicament is for the Manmohan Singh government to build a consensus among
political parties to rebuild the economy on a war footing. But with general
elections less than a year away, the UPA lacks the political capital to make such
a determined effort to arrest the current economic slide.

At USD 390 billion, the external debt was 13% or USD 44.6 billion higher
compared to the figure a year ago. The magnitude of the increase, as spelt out
by the RBI, was offset to some extent due to valuation change (gain) resulting

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from appreciation of the US dollar against the Indian rupee and other
international currencies. In fact, if the effect of the valuation change is
excluded, the addition in external debt last year would be USD 55.8 billion.
An increase of USD 44.6 billion external debt in one year is a huge amount by
any standard. The question is: Why has the external debt risen so sharply over
the last year? Was it because of the spiralling CAD? The increase in the CAD may
not be the sole reason, but it did fuel the rising trend in external debt. This is
reflected in the sharp rise in Indias short-term debt. Such rise, in fact, was
primarily on account of short-term trade credit. There has also been a sizeable
increase in external commercial borrowings as well as rupee denominated NRI
deposits. The RBI, too, has admitted that the high current account deficit
witnessed during 2012-13 and its financing increasingly through debt flows
particularly by trade credit resulted in a significant rise in Indias external debt
during 2012-13.
What must be of greater concern for the Finance Minister P. Chidambaram is that
the short-term debt maturing within a year stood at USD 172 billion at the end of
fiscal 2012-13. This is bound to add to Indias vulnerability. If capital flows dry up
due to some unforeseen events or NRI deposits slow down, three-fifths of the
countrys forex reserves will be exhausted to repay the short-term debt by March
31, 2014.
If this happens, the country may face a balance of payments crisis as well.
Economists point out that while short-term debt in terms of original maturity is
about 31% of forex reserves, in terms of residual maturity or remaining maturity,
a much larger debt is short-term now. According to the latest figures put out by
the RBI, the share of short-term debt of the total external debt by original
maturity was 24.8% but based on residual maturity it was a huge 44.2% at the
end of the last fiscal. Out of this, the share of NRI deposits was about 28%. That
is, a part of the debt that was originally long-term and is coming up for maturity
now along with some debt exposure being un-hedged, will put serious pressure
on the currency. Unless the debt is rolled over for a longer period, there will be
pressure on balance of payments and on the current account balance as well.
For that matter, India is probably already feeling the pressure on balance of
payments. The import cover of foreign exchange reserves is down to about 6.5
months from 15 months in the pre-global slowdown days when the GDP growth
was touching new highs, capital flows were steady and the currency was strong.
During the second half of last June, Indias foreign exchange reserves depleted
from USD 290 billion on June 14 to USD 287 billion on June 28.
Another big contributor to the rising debt is external commercial borrowings
(ECBs), which account for about a third of the total external debt. The ECBs were
encouraged to enable Indian industries to meet their genuine import costs and
spur growth, but there is no tracking of whether the money raised through ECB is
being used to bridge the gap between borrowings abroad and their utilization at

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home. Thus, while the funds raised through the ECB route have resulted in the
escalation of external debt, such funds are also putting pressure on our
repayment schedule, since a part of it, it is apprehended, is not being used to
create output generating capacity back home.

Future Trend:

Looking at the reasons which contribute to increase in External Debt, it

would go on rising even in future
The depreciation of INR would make the conditions worse
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The steps taken so far seem to be more from point of view of managing
current situations

Recommendation for Improvement

India's total merchandise trade has increased over three-fold from $252bn in
2006 to $794 in 2012 - both exports and imports have trebled during this period
according to the Export-Import Bank of India (Exim bank). The bank is the
premier export finance institution of the country and was set up for the purpose
of financing, facilitating, and promoting foreign trade of India.

Improve Exports & Curtail Imports

Need long term strategic policy decisions to increase exports and
limit imports rather than short term measures by altering
regulations and duties
To reduce oil import set up and encourage alternative energy
Set up domestic arms & ammunition set ups

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Aggressively assist manufacturers to export

Improve Infra structure & Quality
Look at alternate international trade options
Make domestic borrowings more lucrative than ECB
Understand the drivers for ECB and provide easier, cheaper and consistent
domestic borrowing options for most dominant sectors
Plan for quick repayment of non concessional debts
Open up markets to global investment to convert debt to equity ( by FDI)
Stop comparison to developing countries as benchmark and revise
acceptable levels

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