INDIA S EXTERNAL DEBT

INDIA S EXTERNAL DEBT A Status Report GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS AUGUST 2007

FINANCE MINISTER INDIA FOREWORD I am happy to present India s External Debt: A Status Report, which is the thirteenth in the series. The present volume of the Report presents developments in India s external debt during 2006-07 and provides the picture of the country s external debt position since 1990. India has done better in comparison with other indebted countries. According to the latest Global Development Finance, 2007 of the World Bank, which contains data for 2005, the ratio of external debt to Gross National Income was the second lowest for India after that for China. The concessional loan component in India s debt portfolio was the highest amongst the top ten indebted countries. Likewise, the ratio of short-term debt to foreign exchange reserves was the lowest for India and the share of short-term debt in total debt was the second lowest. India accumulated the least amount of external debt between 1990 and 2005. India s external debt stock stood at US$155.0 billion as on March 31, 2007 accounting for 16.4 percent of GDP. The policy pursued by the Government of India towards mobilising foreign resources is guided by the objective of maintaining balance of payments position at a sustainable level and keeping the external debt within manageable limits. Liberalisation of trade and investment as well as the policy shift in favour of attracting non-debt creating flows appear to have served well in external sector management. The external debt policy of the Government continues to focus on raising sovereign loans on concessional terms with longer maturities, rationalising the interest rates on Non-Resident deposits, limiting the level of commercial borrowings as well as restricting their end-use and monitoring of shortterm debt. New Delhi August 2007 (P.CHIDAMBARAM) Finance Minister

CONTENTS Page No. 1. Executive Summary 1 2. External Debt 2 2.1 Introduction 2 2.2 Stock of External Debt 2 2.3 External Debt and Gross Domestic Product 6 2.4 External Debt and Foreign Currency Assets 7 2.5 International Comparison 7 a) Foreign exchange reserve cover of external debt 7 b) External debt stock 8 c) Change in debt stock 8 d) Present value of external debt 9 3. Short-Term Debt 10 3.1 Short-term Debt by Original Maturity 10 3.2 Short term Debt by Residual Maturity 12 4. Classification of Debt Stock 13 4.1 Creditor-wise Classification 13 4.2 Borrower-wise Classification 14 4.3 Instrument-wise Classification 15 4.4 Concessional Debt 16 4.5 Currency Composition 17 5. Debt Servicing 18 5.1 Debt Service Payments 18 5.2 Projections of Debt Service Payments 21 6. External Debt Management 22 6.1 Premature Repayment of High-Cost External Loans 22 6.2 Short-term Debt 23 6.3 Non-Resident Indian Deposits 24 6.4 External Commercial Borrowings 24 6.5 Recommendations of the High Powered Committees pertaing to External Debt 30 6.6 Monitoring of External Debt 30 7. Sovereign External Debt Management 33 7.1 Organisational Arrangement 33 7.2 Sovereign External Debt Management 33 7.3 Sovereign External Debt Service Payments 34 7.4 Projections of Debt Servicing on Government Account Under External Assistance 35

Page No. 8. Contingent Liability on External Debt 37 8.1 Government Guaranteed External Debt 37 9. Conclusion 38 Boxes 6.1 Current Policy of External Commercial Borrowings and Trade Credits 27 7.1 Sovereign Credit Ratings 36 Figures 2.1 Composition of External Debt as at end-march 2007 4 2.2 Rate of Growth of GDP as well as External Debt and Ratio of External Debt to GDP 6 2.3 Ratio of Foreign Exchange Assets to Total External Debt 7 2.4 International Comparison: Forex Reserve cover of Debt of Top Ten Indebted countries, 2005 7 2.5 International comparison of Increase in External Debt between 1990 and 2005 8 3.1 International Comparison - Share of Short-term Debt in Total External Debt, 2005 11 3.2 International Comparison: Proportion of Short-term Debt to Forex Reserves, 2005 11 4.1 International Comparison Share of Concessional Debt in Total Debt, 2005 17 5.1 Debt Service Ratio and Ratio of Foreign Currency Assets to Debt Service Payments 19 6.1 Monthly Yield Rates on Indian Corporate Debt Papers and LIBOR rates 26 Text Tables 2.1 India s External Debt Outstanding 2 2.2 India s External Debt 3 2.3 Key External Debt Indicators 4 2.4 External Debt During Tenth Five Year Plan 5 2.5 India s International Investment Position 6 2.6 International Comparison - Top Ten Debtor Countries amongst Developing Economies, 2005 8 2.7 International Comparison -Present Value of Debt and Income Classification, 2005 9 3.1 Short-term debt by Original Maturity 10 3.2 Short-term debt by Residual Maturity 12 4.1 External Debt Outstanding by Creditor Category 13 4.2 External Debt by Borrower Classification 14 4.3 Instrument-wise Classification of Long-term External Debt Outstanding at end-march 2007 15 (ii)

Annex Page No. 4.4 Share of Concessional Debt 16 4.5 Currency Composition of External Debt 17 5.1 India s External Debt Service Payments 18 5.2 Implicet Interest Rates on India s External Debt 19 5.3 Debt Service Payments by Creditor Category 20 5.4 Principal Repayments under Short-term Debt 20 5.5 International Comparison External Debt Service Payments of Top Ten Debtor Countries amongst Developing Economies, 2005 21 5.6 Projected Debt Service Payments 21 6.1 Prepayment of Government & Non-Government Loans raised under the External Assistance Programme 22 6.2 Country and Institution-wise Prepayment of Sovereign Debt 23 6.3 External Commercial Borrowings 25 6.4 Comparison of Interest Rates, 2005-06 and 2006-07 26 6.5 World Bank/IMF s QEDS India s Gross External Debt Position by Sector 31 6.6 Gross External Debt Position of Select Industrialised and Developing Economies at end-december 2006 as per QEDS 32 7.1 Sovereign External Debt 34 7.2 Sovereign External Debt Service Payments (Actual) 35 7.3 Projection of External Debt Service Payments on Government Account under External Assistance 35 7.4 Credit Ratings of Top Ten Debtors amongst Developing Countries, 2007 36 7.5 India s Sovereign Credit Ratings, 2005 to 2007 36 8.1 Government Guaranteed External Debt 37 Annex-I India s External Debt Outstanding (Annual -Rupees crore) 39 Annex-II India s External Debt Outstanding (Annual- US $ million) 42 Annex-III India s External Debt Outstanding (Quarterly-Rupees crore) 45 Annex-IV India s External Debt Outstanding (Quarterly-US $ million) 48 Annex-V International Comparison Top Ten Debtor Countries, 2005 51 Annex-VI External debt by Borrower Categories 52 Annex-VII India s External Debt Service Payments-Source-wise 53 Annex-VIII India s External Debt Service Payments-by Creditor Categories 54 Annex-IX Report of the Committee on Fuller Capital Account convertibility (Tarapore Committee II, 2006) Recommendation concerning External Debt 55 Annex-X High Powered Expert Committee (HPEC) on Making Mumbai an International Financial Centre 56 Abbreviations 57 (iii)

1. EXECUTIVE SUMMARY 1.1 At end-march 2007, India s external debt stock stood at US$155.0 billion, increasing from US$ 126.5 billion at end-march 2006. The debt accumulation of US$ 28.5 billion during the year represents an increase of 22.6 per cent. Almost 10 per cent of the addition in total external debt during the year was ascribed to a valuation change as a result of the weakening US dollar vis-à-vis other major international currencies. In terms of rupees, India s external debt at end-march 2007 stood at Rs. 675,857 crore, reflecting a rise of 19.7 per cent over Rs. 564,553 crore at end-march 2006. The rise in India s external debt during 2006-07 in terms of rupees was smaller as compared to the increase in dollar terms due to the appreciation of the Indian rupee principally against the US dollar. Component-wise, as much as 56 per cent of the increase was accounted for by commercial borrowings, followed by Non-Resident Indian (NRI) deposits (16 per cent), short-term debt (12 per cent) and multilateral debt (11 per cent). 1.2 While the total external debt stock rose during the year, the movement in critical external debt indicators showed a mixed trend. Debt service ratio showed a perceptible improvement, declining from 9.9 per cent during 2005-06 to 4.8 per cent during 2006-07. Besides, the foreign exchange reserves accounted for a cover of as much as 129 per cent to total external debt stock. However, other indicators, such as debt to Gross Domestic Product (GDP) ratio rose to 16.4 per cent, short-term debt to GDP ratio to 1.3 per cent, short-term debt to total debt to 7.7 per cent, and short-term debt to foreign exchange assets to 6.2 per cent. 1.3 In comparison to other indebted countries, India s external debt position remained comfortable, as indicated by the World Bank s Global Development Finance (GDF), 2007. India s debt to Gross National Income (GNI) ratio at 15.4 per cent in 2005 was the second lowest after China. Amongst the top ten indebted countries, India recorded the lowest accumulation of external debt between 1990 and 2005. The element of concessionality in India s external debt portfolio was the highest. Moreover, the ratio of India s short-term debt to foreign exchange reserves in 2005 was the lowest among the top ten debtor countries. Amongst the developing countries, India ranked seventh in terms of the level of external debt. 1.4 During the past few years, the external debt service ratio has followed a declining trend, due to the moderation in debt service payments coupled with expansion in external current receipts. Total debt service payments declined over the year to US$ 11.8 billion in 2006-07 from US$19.6 billion in the preceding year. While the debt service ratio softened during the year, the ratio of interest payments to current receipts too came down from 2.7 per cent during 2005-06 to 1.8 per cent in 2006-07. 1.5 The debt outstanding on Government account under external assistance since 2002 has been in the range of US$ 41 billion and US$ 47 billion. Total sovereign debt relative to GDP declined steeply from 9.1 per cent at end-march 2002 to 5.3 per cent at end-march 2007, while the absolute amount of total sovereign debt increased from US$ 43.6 billion to US$ 48.6 billion over the same period. Government guaranteed external debt, which has been declining in the past few years, rose marginally to US$ 6,107 million at end-march 2007 from US$ 6,096 million at end- March 2006. However, as a percentage of total debt, government debt together with government guaranteed debt, has shown a steady decline from 51.2 per cent at end-march 2002 to 40.6 per cent at end-march 2006 and further to 35.3 per cent at end-march 2007. 1.6 During 2006-2007, further concerted efforts were made to improve the compilation and analysis of external debt statistics so as to ensure a better management information system. All the major units engaged in the collection of debt statistics use Commonwealth Secretariat-Debt Recording and Management System (CS-DRMS), a software package developed by the Commonwealth Secretariat, London. Continuous improvement in the presentation and dissemination of external debt statistics made it possible for India to join the World Bank s Quarterly External Debt Statistics in November 2006. 1.7 The Government of India (GOI) continued to follow a cautious external debt policy so as to keep external debt within manageable limits. Raising sovereign loans on concessional terms and from less expensive sources with longer maturities, monitoring of short-term debt and encouraging non-debt creating flows are some of the important elements of current external debt policy. 1

2. EXTERNAL DEBT 1 2.1 Introduction 2.1.1 Economic reforms, initiated in 1991, marked a policy shift in favour of non-debt creating flows. As a result, India s external debt position showed a gradual improvement as reflected in the strengthening of debt sustainability indicators from year to year in the post-reform period. The current level of India s external debt is within manageable limits as measured by the debt sustainability indicators such as debt to GDP and debt service ratios as well as foreign exchange cover of external debt. 2.2 Stock of External Debt 2.2.1 At end-march 2007, India s external debt stock stood at US$155.0 billion (Table 2.1). The debt accumulation of as much as US$ 28.5 billion during the financial year indicating an increase of 22.6 per cent, has been one of the fastest annual increases so far. However, nearly 10 per cent of the increase in debt during the year could be explained by the valuation change, reflecting the weakening of the US dollar against major international currencies and the Indian rupee. The rise in India s external debt during 2006-07 in terms of rupees was smaller as compared to the increase in dollar terms owing to the appreciation of the rupee essentially against the US dollar. In terms of rupees, India s external debt at end-march 2007 stood at Rs. 675,857 crore, reflecting a rise of 19.7 per cent over Rs. 564,553 crore at end-march 2006. Annex I to Annex IV provide data on India s external debt stock since 1990 on annual and quarterly basis, both in terms of US dollars and rupees. Table 2.1 : India s External Debt Outstanding At end-march Category 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE 1 2 3 4 5 6 7 8 9 10 (US$ million) Long-term Debt 75,257 88,696 97,698 96,098 100,245 107,214 116,631 117,779 143,062 Short-term Debt 8,544 5,034 3,628 2,745 4,669 4,431 7,529 8,696 11,971 Total External Debt 83,801 93,730 101,326 98,843 104,914 111,645 124,160 126,475 155,033 (Rupees crore) Long-term Debt 146,226 304,091 455,706 468,932 476,624 471,827 510,629 525,764 623,669 Short-term Debt 16,775 16,637 16,919 13,396 22,180 19,251 32,922 38,789 52,188 Total External Debt 163,001 320,728 472,625 482,328 498,804 491,078 543,551 564,553 675,857 R: Revised ; QE: Quick Estimates. 2.2.2 In terms of components, the increase in debt stock between end-march 2006 and end-march 2007, was primarily brought about by an increase of US$ 15,878 million in commercial borrowings, US$ 4,490 million in NRI deposits, US$ 3,275 million in short-term 1 Gross external debt, at any given time, is defined as 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 non-residents by residents of an economy. (External Debt Statistics - Guide for Compilers and Users 2003, IMF). While long-term debt is defined to include external debt that has a maturity of more than one year, short-term debt refers to that debt which has maturity of one year or less. India s external debt statistics are compiled on the basis of the definition provided by the IMF. 2

debt and US$ 3,082 million in multilateral debt (Table 2.2 ). As much as 89 per cent of the increase in external debt during the year was accounted for by long-term debt and around 11 per cent rise was contributed by short-term debt. Under long-term debt, the outstanding under commercial borrowings rose by around 59 per cent over the year mainly due to higher access to international capital markets by Indian corporates. To meet higher corporate demand for commercial borrowings, the ceiling on approvals of commercial borrowings was raised from US$ 16 billion in 2005-06 to US$ 22 billion in 2006-07. The surge in NRI deposits during 2006-07 could be partly attributed to the preference of NRIs to park their savings in deposits with the Indian banking system because of interest rate arbitrage. The total inflows under NRI deposits under Non-Resident External Rupee Account {NR (E) RA} amounted to US$ 3,895 million. The appreciating rupee not only stimulated the inflow of NRI deposits but also affected outstanding balances under NR (E) RA which are denominated in rupees. The appreciation of the rupee against the US dollar by 2.3 per cent on a point-to-point basis between April 1, 2006 and March 31, 2007 escalated the outstanding balances under NR(E)RA in terms of US dollars by a little over half a billion US dollars. Short-term debt witnessed a sharp increase because of a higher level of imports during the year, particularly oil imports. The ratio of short-term debt to total imports went up from 5.5 per cent in 2005-06 to 6.2 per cent in 2006-07. Table 2.2 : India s External Debt (US$ million) Sl. Components At the end of March Variation (absolute) No. March 06 to March 05 to 2007 2006 2005 March 07 March 06 QE R R (3-4) (4-5) 1 2 3 4 5 6 7 1 Multilateral 35,641 32,559 31,698 3,082 861 2 Bilateral 16,104 15,734 17,011 370-1,277 3 IMF 0 0 0 0 0 4 Export credit 6,964 5,419 5,021 1,545 398 5 Commercial borrowing 42,780 26,902 27,857 15,878-955 6 NRI Deposits (long-term) 39,624 35,134 32,743 4,490 2,391 7 Rupee debt 1,949 2,031 2,301-82 -270 8 Short-term debt 11,971 8,696 7,529 3,275 1,167 9 Total External Debt (1 to 8) 155,033 126,475 124,160 28,558 2,315 R: Revised; QE: Quick Estimates. 2.2.3 In terms of proportion, long-term debt comprised 92.3 per cent and short-term debt 7.7 per cent of total external debt at end-march 2007. Under long-term debt, multilateral and bilateral debt, representing broadly the loans raised under the external assistance programme, accounted for around 33.4 per cent of total external debt. The deposits of NRIs and commercial borrowings, together with export credit, constituted 57.7 per cent of total external debt. The share of rupee debt was at 1.3 per cent (Figure 2.1). 3

Figure 2.1: Composition of Exernal Debt as at end-march 2007 Short-term debt 7.7% Rupee debt 1.3% Multilateral 23.0% NRI Deposits (long-term) 25.6% Bilateral 10.4% Export credit 4.5% Commercial borrowing 27.6% Multilateral Bilateral Export credit Commercial borrowing NRI Deposits (long-term) Rupee debt Short-term debt 2.2.4 Although external debt increased in absolute terms during 2006-07, the movement in critical external debt indicators showed a mixed trend. While debt service ratio, proportion of debt to current receipts, and ratio of foreign exchange reserves to total debt improved over the year, other indicators such as ratio of external debt to GDP, share of concessional debt in total debt, proportion of short-term debt to total debt, foreign exchange assets and GDP, showed a marginal deterioration (Table 2.3). Table 2.3 : Key External Debt Indicaters (per cent) Year Debt Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Ratio of Service Debt to Forex Total Conces- Short-term Short-term Short-term Ratio Current Reserves External sional Debt Debt to Debt to Debt to Receipts to Total Debt to to Total Forex GDP Total Debt GDP Debt Assets Debt 1 2 3 4 5 6 7 8 9 1990-91 35.3 328.9 7.0 28.7 45.9 382.1 3.0 10.2 1991-92 30.2 312.3 10.8 38.7 44.8 125.6 3.2 8.3 1992-93 27.5 323.4 10.9 37.5 44.5 98.5 2.7 7.0 1993-94 25.4 275.6 20.8 33.8 44.4 24.1 1.3 3.9 1994-95 25.9 235.8 25.4 30.8 45.3 20.5 1.3 4.3 1995-96 26.2 188.9 23.1 27.0 44.7 29.5 1.4 5.4 1996-97 23.0 169.6 28.3 24.6 42.2 30.1 1.8 7.2 1997-98 19.5 159.8 31.4 24.3 39.5 19.4 1.3 5.4 1998-99 18.7 162.1 33.5 23.6 38.5 14.5 1.0 4.4 1999-00 17.1 145.6 38.7 22.0 38.9 11.2 0.9 4.0 2000-01 16.6 130.8 41.7 22.5 35.4 9.2 0.8 3.6 2001-02 13.7 122.1 54.7 21.1 35.9 5.4 0.6 2.8 4

1 2 3 4 5 6 7 8 9 2002-03 16.0* 110.2 72.5 20.3 36.8 6.5 0.9 4.5 2003-04 16.1** 93.6 101.2 17.8 36.1 4.1 0.7 4.0 2004-05R 6.0^ 81.0 114.0 17.4 33.1 5.6 1.1 6.1 2005-06R 9.9# 64.3 119.9 15.8 31.2 6.0 1.1 6.9 2006-07QE 4.8 63.1 128.5 16.4 25.7 6.2 1.3 7.7 * Works out to 12.4 %, with the exclusion of prepayment of US$ 3,430 million. ** Works out to 8.2 %, with the exclusion of prepayment of US$ 3,797 million and redemption of Resurgent India Bonds (RIBs) of US$ 5,549 million. ^ Works out to 5.7 % with the exclusion of prepayments of US$ 381 million. # Works out to 6.3 %, with the exclusion of India Millennium Deposits (IMDs) repayments of US$ 7.1 billion and prepayment of US$ 23.5 million. R: Revised; QE: Quick Estimates. 2.2.5 The increase in external debt of US$ 56.2 billion (57 per cent) during the Tenth Five Year Plan (2002-07) has been the largest increase during any Plan period (Table 2.4). Out of this, the increase of US$ 12.2 billion or around 22 per cent was on account of valuation change, reflecting the depreciation of the US dollar. However, in dollar terms, increase in external debt at 57 per cent was lower as compared to the growth of 91 per cent of GDP at current market prices during the Tenth Five Year Plan period. In rupee terms, India s external debt grew by around 40 per cent and GDP expanded by 81 per cent. Table 2.4: External Debt during Tenth Five Year Plan 5 (US$ million) At end-march External Debt Annual Increase 1 2 3 2002 98,843 2003 1,04,914 6,071 2004 1,11,645 6,731 2005 R 1,24,160 12,515 2006 R 1,26,475 2,315 2007 QE 1,55,033 28,558 Increase in Debt during the Tenth Plan Period 56,190 R: Revised; QE: Quick Estimates. 2.2.6 Furthermore, although the external debt stock rose markedly during the Tenth Five Year Plan period, the net international liabilities, which represent the difference between gross international liabilities (both debt and non-debt stocks) and international assets came down significantly by around US$ 23 billion or 33 per cent between 2002 and 2006 (latest year for which data on International Investment Position are available), mainly due to the increase in India s foreign exchange reserves (Table 2.5). It is also noted that debt creating flows {external assistance loans, external commercial borrowings (ECB) and NRI deposits} during the period 1991-92 to 2006-07 were US$ 80.7 billion, less than half of the total increase in reserves of US$ 193.4 billion during this period.

Table 2.5: India s International Investment Position (US $ billion) Sl.No. Assets/Liabilities At end-march 2001 2002 2003 2004 2005R 2006QE 1 2 3 4 5 6 7 8 A Assets 62.47 73.62 95.59 137.78 168.9 183.13 1. Direct Investment Abroad 2.62 4.01 5.83 7.76 10.11 12.07 2. Portfolio Investment 0.51 0.65 0.78 0.76 0.81 1.29 3. Financial Derivatives 4. Other Investment 16.46 14.24 12.88 16.31 16.48 18.15 5. Reserve Assets 42.90 54.72 76.10 112.96 141.51 151.62 B Liabilities 138.63 142.74 156.05 183.12 209.22 229.20 1. Direct Investment in Reporting Economy 20.33 25.42 31.22 38.18 43.59 50.26 2. Portfolio Investment 31.30 31.54 32.41 43.70 55.28 63.36 3. Other Investment 87.01 85.78 92.42 101.25 110.34 115.58 a. Trade Credits 4.88 3.83 4.88 6.28 9.56 10.54 b. Loans 63.99 62.72 61.05 61.87 65.76 67.77 c. Currency and Deposits 17.81 18.51 25.57 32.18 33.64 36.16 Other Liabilities 0.33 0.72 0.92 0.92 1.39 1.11 C Net Assets (+)/ Net Liabilities (-) -76.15-69.12-60.46-45.27-40.31-46.07 R: Revised; QE: Quick Estimates. Source: Reserve Bank of India 2.3 External Debt and Gross Domestic Product 2.3.1 The ratio of external debt to GDP which had been showing a declining trend in the postreform era, as a result of external debt expanding at a much lower rate than GDP, recorded a slight increase from 15.8 per cent in 2005-06 to 16.4 per cent in 2006-07 (Figure 2.2). Fig. 2.2 : Rate of Growth of GDP as well as External Debt and Ratio of External Debt to GDP 30.0 28.7 Ratio 25.0 20.0 15.0 10.0 25.2 17.0 27.0 17.3 22.5 10.3 21.1 8.5 20.3 17.8 12.5 13.1 17.4 10.7 15.8 14.1 19.7 16.4 15.7 5.0 0.0 2.9 7.7 2.1 7.8 3.4-1.5 3.9-5.0 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Year External Debt-GDP Ratio GDP at current market prices (Rs.) Growth Rate External Debt (Rs.) Growth Rate 6

2.4 External Debt and Foreign Currency Assets 2.4.1 India s foreign exchange reserves, which include foreign currency assets of the Reserve Bank of India (RBI), gold, Special Drawing Rights (SDRs) and Reserve Tranche Position in the International Monetary Fund (IMF) were US$ 199.2 billion as at end-march 2007 providing a cover of 128.5 per cent for external debt. However, the foreign currency assets of the RBI alone, which stood at US$ 191.92 billion, accounted for a cover of 124 per cent to total external debt stock. This contrasts with the cover of foreign currency assets to external debt which was just below 3 per cent at end-march 1991 (Figure 2.3). The progressive improvement in foreign exchange cover of external debt indicates that the foreign currency assets of RBI were brought about principally by factors other than debt-creating flows. Figure 2.3 : Ratio of Foreign Exchange Assets to Total External Debt 140 120 109.2 114.7 123.8 100 96.2 Ratio 80 60 51.6 68.5 40 39.0 20 0 18.2 2.7 1991 1996 2001 2002 2003 2004 2005 2006 2007 Period (End-March) 2.5 International Comparison (a) Foreign exchange reserve cover of external debt 2.5.1 In terms of foreign exchange reserve cover of external debt, India had the second highest cover of around 112 per cent in 2005 among the top ten indebted countries, according to the Global Development Finance 2007, World Bank. China had the highest cover of around 295 per cent (Figure 2.4). Figure 2.4 : International Comparison: Forex Reserve Cover of External Debt of Top Ten Indebted Countries, 2005 350 300 295.23 250 Per cent 200 150 111.94 100 79.58 50 44.32 43.07 30.69 28.62 28.12 25.00 24.56 0 China India Russian Federation Mexico Poland Turkey Brazil Hungary Indonesia Argentina Country Forex Reserve cover of external debt Source: Global Development Finance, 2007, World 7

(b) External debt stock 2.5.2 Among the top ten debtor countries of the developing world, India improved its position from being third in 1991 to the eighth position in 1995. India s position, however, slipped to seventh in 2005 (Annex V). 2.5.3 India s debt to GNI ratio at 15.4 per cent in 2005 was the second lowest after China at 12.5 per cent (Table 2.6). Table 2.6 : International Comparison - Top Ten Debtor Countries Amongst Developing Economies, 2005 Sl. Country Total External Debt Debt to GNI No. (US$ million) (ratio as per cent) 1 2 3 4 1 China 281,612 12.5 2 Russian Federation 229,042 30.7 3 Brazil 187,994 24.4 4 Turkey 171,059 47.3 5 Mexico 167,228 22.1 6 Indonesia 138,300 49.7 7 India 123,123 15.4 8 Argentina 114,335 64.6 9 Poland 98,821 33.8 10 Hungary 66,119 64.5 GNI: Gross National Income Source: Global Development Finance, 2007, World Bank (c) Change in debt stock 2.5.4 Amongst the top ten developing indebted countries, India recorded the lowest addition of US$ 39.5 billion between 1990 and 2005 as per World Bank s Global Development Finance (GDF), 2007. This is in sharp contrast to other indebted countries as some of them added more than double their external debt stock during this period (Figure 2.5). 450 400 Figure 2.5 : International Comparison of Increase in External Debt between 1990 and 2005 409.2 350 300 Per cent 250 200 211.9 246.1 150 100 50 47.2 56.7 60.1 83.7 97.9 100.2 0 India Brazil Mexico Argentina Indonesia Poland Hungary Turkey China Source: Global Development Finance, 2007, World Bank. C 8 t Country

(d) Present value of external debt 2.5.5 Present Value (PV), which reflects the element of concessionality in the external debt portfolio, is a useful measure of indebtedness. Inter-country comparison becomes meaningful when the nominal level of external debt is translated into PV of debt. The PV of external debt is arrived at by discounting the future stream of debt service payments for individual loans by appropriate discount rates and aggregating such PVs for all loans. 2.5.6 In the case of India, the PV of external debt in 2005 was US$ 110.6 billion, while the debt stock in absolute terms was US$123.1 billion in the same year, which reflects the large element of concessional debt. In fact the element of concessional loans for India is highest amongst the top ten debtor countries. India compares well both in terms of: (i) ratio of PV of external debt to GNI at 16 per cent; and (ii) ratio of PV of external debt to export of goods and services (XGS) at 73 per cent, being the second lowest after China (Table 2.7). 2.5.7 Based on per capita GNI of 2005, the World Bank classified the different countries as follows: (i) low-income countries whose GNI per capita was less than US$ 875; (ii) middle-income countries as those with GNI per capita between US$ 876 and US$ 10,725; and (iii) high-income countries whose GNI per capita exceeded US$ 10,275. While the other nine countries amongst the top ten debtor countries were categorised as middle-income countries, India was classified under the low-income category. Table 2.7 : International Comparison-Present Value of Debt and Income Classification, 2005 Sl. No Country PV of Debt Ratio of PV of Ratio of PV of Income (US$ million) Debt/GNI(per cent)* Debt/XGS(per cent)* Classification 1 2 3 4 5 6 1 China 275,534 14 40 Middle 2 Russian Federation 230,298 40 104 Middle 3 Brazil 209,559 34 183 Middle 4 Turkey 177,626 59 195 Middle 5 Mexico 178,876 26 79 Middle 6 Indonesia 138,508 55 159 Middle 7 India 110,647 16 73 Low 8 Argentina 107,913 73 245 Middle 9 Poland 96,234 39 98 Middle 10 Hungary 63,598 69 96 Middle * While PV relates to the year 2005, GNI and XGS relate to the average for the years 2003-2005. PV: Present Value GNI: Gross National Income XGS: Export of Goods and Services Source: Global Development Finance, 2007, World Bank 9

3. SHORT-TERM DEBT 3.1 Short-term Debt by Original Maturity 3.1.1 Accumulation of a large amount of short-term debt, defined to be that maturing in one year or less, makes the economy vulnerable to external shocks. In view of this, short-term debt is currently permitted to be raised only for trade-related purposes under normal terms and conditions. Moreover, no roll-over of short-term credits beyond six months is allowed. The RBI compiles and monitors the stock of short-term debt regularly on the basis of periodic reports submitted by the Authorised Dealers (ADs). Short-term TCs witnessed a sharp increase of US$ 3.3 billion in 2006-07 over the previous year s level to reach US$ 11.97 billion (37.7 per cent). This was caused by a higher level of imports during 2006-07, particularly oil imports, but is still well within reasonable limits. 3.1.2 As shown in Table 3.1, short-term debt comprises at present only TCs which broadly include buyers credit and suppliers credit of 180 days to one year. Suppliers credits with less than 180 days maturity are not captured. Other components of short-term debt, such as the short-term element of NRI deposits, were entirely liquidated by the end of March 2005 and foreign currency (banks and others) deposits were terminated in the early 1990s. As the short-term TCs are importrelated, the ratio of outstanding short-term TCs to total imports is also given in Table 3.1. Table 3.1: Short-term Debt by Original Maturity (US$ million) Components At end-march 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE 1 2 3 4 5 6 7 8 9 10 A. Short-term Debt (i+ii+iii): 8,544 5,034 3,628 2,745 4,669 4,431 7,529 8,696 11,971 i) NRI Deposits 1 3,577 2,883 957 968 1,962 304 0 0 0 ii) FC (B&O) Deposits (up to one year maturity) 167 0 0 0 0 0 0 0 0 iii) Trade Credits 2 4,800 2,151 2,671 1,777 2,707 4,127 7,529 8,696 11,971 B. Imports 3 (during the year) 27,915 43,670 57,912 56,277 64,464 80,003 118,779 156,993 191,995 C. Ratio of Trade Credits to Imports (%) (iii as a per cent of B) 17.2 4.9 4.6 3.2 4.2 5.2 6.3 5.5 6.2 1. Short-term component of NRI deposits comprise Foreign Currency Non-Resident Accounts, [FCNR (A)]; Foreign Currency Non-Resident Bank Deposits, [FCNR (B)]; and Non-Resident External Rupee Account [NR (E) RA]. By the end of March 2005, deposits of less than one year maturity (short-term) under NRI deposits were completely eliminated. While short-term deposits of less than one-year maturity under FCNR(A) were withdrawn with effect from May 15, 1993, such deposits under FCNR (B) and NR(E)RA were withdrawn effective October 1999 and April 2003, respectively. 2. Data on short-term TCs of less than six months in respect of suppliers credit are not available since end-march 1994. 3. On balance of payments basis. R: Revised; QE: Quick Estimates. 3.1.3 Despite the rise in short-term debt in absolute terms during 2006-07, the indicators of debt sustainability relating to short-term debt continued to reflect a comfortable position. The ratio of short-term debt to total debt had declined over the years from 10.2 per cent in 1991 to 2.8 per cent as at end-march 2002. However, it started rising gradually thereafter to reach 7.7 per cent at end- March 2007. Short-term debt as a percentage of GDP which was at 3 per cent in 1991 had come down to 0.6 per cent at end-march 2002, but has risen to 1.3 per cent at end-march 2007. The ratios of short-term debt to foreign currency assets and foreign currency reserves at end-march 2007 were 6.2 per cent and 6 per cent, respectively. 10

3.1.4 Figure 3.1 is drawn on the basis of the Global Development Finance, 2007, World Bank and depicts India s position in terms of the ratio of short-term debt to total debt, relative to that of the other debtor countries for the year 2005. 60.0 Figure 3.1 : International Comparison - Share of Short-term Debt in Total External Debt, 2005 50.0 52.6 40.0 Ratio 30.0 22.3 20.0 18.7 17.9 17.7 16.9 10.0 12.8 10.5 7.1 3.9 0.0 China Turkey Hungary Poland Indonesia Argentina Brazil Russian Federation C t i Source: Global Development Finance, 2007, World Bank. Country India Mexico Note: The coverage under short-term debt varies across the countries. For example Hungary excludes less than 90 days trade credits, Turkey includes LC based credits as well as acceptance credits, India excludes suppliers credit of less than 180 days and China includes delayed import payments of only more than 180 days and above US$ 200,000. 3.1.5 Similarly, India s ratio of short term debt to foreign exchange reserves was the lowest among the top ten debtor countries at 6.4 per cent (Figure 3.2). 80.0 Figure 3.2: International Comparison: Proportion of Short Term Debt to Forex Reserves, 2005 70.0 66.7 68.9 70.9 72.8 60.0 Ratio 50.0 40.0 41.6 44.6 30.0 20.0 17.8 13.2 10.0 6.4 8.9 0.0 India Mexico Russian Federation Source: Global Development Finance, 2007, World Bank. China Poland Brazil Hungary Argentina Indonesia Turkey Countries 11 Country

3.2 Short-term Debt by Residual Maturity 3.2.1 For the analysis of external debt data, it is possible to use either data based on original maturity or on residual maturity. The advantage of using original maturity is that it helps in comprehending the nature of capital flows. Residual maturity, on the other hand, helps in understanding the profile of debt service payments and the consequent charge on the foreign exchange reserves aiding the liquidity management. Short-term debt by residual maturity comprises principal repayments due during a one-year reference period, under medium-and long-term loans, and shortterm debt with original maturity of one year or less. 3.2.2 Table 3.2 shows the estimates of short-term debt by residual maturity. These do not include: (i) suppliers credits of less than 180 days, as these are difficult to be captured since normal trade payments are allowed to be made within 180 days; (ii) NRI deposits matured in one year; and (iii) redemption of debt instruments by Foreign Institutional Investors (FIIs). Table 3.2: Short-term Debt by Residual Maturity (US$ million) Components At end-march 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE 1 2 3 4 5 6 7 8 9 10 1. Short-term Debt by Original Maturity 8,544 5,034 3,628 2,745 4,669 4,431 7,529 8,696 11,971 2. Long-term Debt Obligations Maturing within one year 4,705 8,229 6,776 11,530 14,614 6,117 14,341 7,327 6,938 3. External Debt by Residual Maturity up to 1 year (1+2) 13,249 13,263 10,404 14,275 19,283 10,548 21,870 16,023 18,909 Per cent of GDP 4.2 3.7 2.2 3.0 3.8 1.8 3.1 2.0 2.1 Per cent to Total Debt 15.8 14.2 10.3 14.4 18.4 9.4 17.6 12.7 12.2 Per cent to Foreign Currency Assets 592.5 77.8 26.3 28.0 26.8 9.8 16.1 11.0 9.8 Note: Data on external debt with residual maturity are actuals for the years up to end-march 2006. These are estimated for end-march 2007. R: Revised ; QE: Quick Estimates. 12

4. CLASSIFICATION OF DEBT STOCK The data on external debt stock can be broken down into different categories depending upon the purpose of analysis and presentation. In addition to the standard format in which India s external debt data are disseminated on a regular basis, other classifications can be attempted on the basis of: (i) creditor and borrower approach; (ii) disaggregating government and non-government debt; and (iii) measuring the share of official and private creditors. External debt can also be analysed in terms of currency composition, grouping external debt under various instruments and measuring the element of concessionality in debt portfolio. 4.1 Creditor-wise Classification 4.1.1 External debt can be classified as per creditor categories, namely official creditors and private creditors. Official creditors include multilateral and bilateral agencies, along with loans taken from the IMF, export credit components of bilateral credit, export credit for defence purchases and rupee debt. Private creditors, on the other hand, include those under commercial borrowings, NRI deposits and export credits other than those included under official creditors, and short-term debt. 4.1.2 Outstanding loans from multilateral and bilateral sources increased in absolute terms by 9.6 per cent between end-march 2002 and end-march 2007. The borrowings (purchases) from the IMF were fully repaid (repurchased) by 2000. The outstanding borrowings from private sources, consisting of commercial borrowings, export credit and NRI deposits, increased by around 1.9 times during this period. The component of rupee debt declined from over US$ 3 billion to less than US$ 2 billion. Short-term debt registered a significant increase of around four times between 2002 and 2007. The share of private creditors which was less than 50 per cent at end-march 2002, rose progressively to around 65 per cent at end-march 2007 (Table 4.1). Table 4.1: External Debt Outstanding by Creditor Category (US$ million) At end-march Sl Components 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE No. 1 2 3 4 5 6 7 8 9 10 11 1 Multilateral 20,900 28,616 31,105 31,899 29,994 29,297 31,698 32,559 35,641 2 Bilateral 14,168 19,213 15,975 15,323 16,802 17,277 17,011 15,734 16,104 3 IMF 2,623 2,374 0 0 0 0 0 0 0 4 Export Credit 4,301 5,376 5,923 5,368 4,995 4,697 5,021 5,419 6,964 5 Commercial Borrowings 10,209 13,873 24,408 23,320 22,472 22,007 27,857 26,902 42,780 6 NRI Deposits 10,209 11,011 16,568 17,154 23,160 31,216 32,743 35,134 39,624 7 Rupee Debt 12,847 8,233 3,719 3,034 2,822 2,720 2,301 2,031 1,949 A Total Long Term Debt (1 to 7) 75,257 88,696 97,698 96,098 100,245 107,214 116,631 117,779 143,062 B Short-term Debt 8,544 5,034 3,628 2,745 4,669 4,431 7,529 8,696 11,971 C Total External Debt (A+B) 83,801 93,730 101,326 98,843 104,914 111,645 124,160 126,475 155,033 (percentage to total debt) i Share of Official Creditors 63.5 64.2 51.2 51.8 48.3 45.2 42.0 40.6 35.4 ii Share of Private Creditors 36.5 35.8 48.8 48.2 51.7 54.8 58.0 59.4 64.6 QE: Quick Estimates; R: Revised. 13

4.1.3 The respective shares of individual components in total debt have been undergoing changes. For instance, between 2002 and 2007, the share of multilateral debt in total debt declined from around 32 per cent to 23 per cent. Over the same period, bilateral debt too declined from 16 per cent to 10 per cent of total debt. Export credit continued to be around 5 per cent of total debt at end-march 2002 and at end-march 2007. While commercial borrowings increased from 24 per cent in 2002 to around 28 per cent in 2007, NRI deposits rose from 17 per cent to about 26 per cent over the same period. Rupee debt recorded a fall from around 3 per cent to 1 per cent over the same period. The proportion of short-term debt increased from 3 per cent in 2002 to more than 7 per cent in 2007. 4.2 Borrower-wise Classification 4.2.1 External debt can be classified according to the borrower categories as well. The two broad categories are government (sovereign) and non-government. Besides multilateral and bilateral borrowing on government account under the external assistance programme, government debt includes borrowings from the IMF, rupee debt and FII investment in government securities. The rest of the external debt, including short-term debt, is shown under non-government debt. The proportion of government debt in total external debt has been declining, having gone down from 59.6 per cent at end-march 1991 to 44.1 per cent at end-march 2002 to 31.4 per cent at end-march 2007 (Table 4.2) (Annex VI). 4.2.2 Non-government debt can be further categorised into financial, public and private sectors. Of these, the private sector has gained in importance in the recent years in absolute terms and also in terms of share due to higher commercial borrowings. In terms of proportion to long-term nongovernment debt, the share of the private sector rose to almost 42 per cent at end-march 2007 from 22 per cent at end-march 2002. Table 4.2: External Debt by Borrower Classification 14 (US$ million) At end-march Sl No. Components 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE 1 2 3 4 5 6 7 8 9 10 11 I. Government Debt 48,585 53,569 43,956 43,575 43,612 44,674 46,604 45,236 48,608 (58.0) (57.2) (43.4) (44.1) (41.6) (40.0) (37.5) (35.8) (31.4) Of which ong-term: 48,585 53,569 43,956 43,575 43,612 44,674 46,604 45,236 48,608 1. Govt. Account 34,317 43,404 40,727 40,965 41,216 41,142 43,621 43,427 46,596 2. Other Govt. Debt 14,268 10,165 3,229 2,610 2,396 3,532 2,983 1,809 2,012 II. Non-Government Debt 35,216 40,161 57,370 55,268 61,302 66,971 77,556 81,239 106,425 (42.0) (42.8) (56.6) (55.9) (58.4) (60.0) (62.5) (64.2) (68.6) A. Of which long-term: 26,672 35,127 53,742 52,523 56,633 62,540 70,027 72,543 94,454 1. Financial Sector* - - 32,661 32,367 37,032 40,575 43,454 41,185 47,888 2. Public Sector** - - 9,024 8,225 7,518 7,685 6,491 6,664 8,013 3. Private Sector*** - - 12,057 11,931 12,083 14,280 20,082 24,694 38,553 B. Of which short-term: 8,544 5,034 3,628 2,745 4,669 4,431 7,529 8,696 11,971 III Total External Debt 83,801 93,730 101,326 98,843 104,914 111,645 124,160 126,475 155,033 Figures in parentheses indicate percentage to total external debt. *: Financial sector represents borrowings by banks and financial institutions and also long-term NRI deposits. **: Public sector debt represents borrowings of non-financial public sector enterprises. ***: Private sector debt represents borrowings of non-financial private sector enterprises. R: Revised ; QE: Quick Estimates.

4.3 Instrument-wise Classification 4.3.1 Long-term external debt outstanding can also be classified as per the instruments of borrowing. These consist broadly of bonds and notes, loans, trade credits and deposits. Table 4.3 shows different instruments of borrowing broken down into borrower and creditor groups. 4.3.2 The major part of government debt outstanding as at end-march 2007 consisted of loans, while debt outstanding under the financial sector was on account of deposits (83 per cent) as NRI deposits held with the Indian banking system formed a major part of the financial sector s external debt liabilities. Loans were the most popular instrument used by the other borrowers such as nonfinancial public sector (93 per cent) and non-financial private sector (69 per cent). In all, loans accounted for 60 per cent of the total long-term debt outstanding at end-march 2007. Table 4.3: Instrument-wise Classification of Long-term External Debt Outstanding at end-march 2007 (US$ million) Borrower Creditor Instruments Bonds & Loans Trade Deposits Total Notes Credits 1 2 3 4 5 6 7 I Govt. 572 46,953 1,083 0 48,608 1 Multilateral 0 32,837 0 0 32,837 2 Bilateral 0 12,450 0 0 12,450 3 IMF 0 0 0 0 0 4 Export Credit 0 0 1,083 0 1,083 5 Commercial* 572 0 0 0 572 6 Rupee Debt 0 1,666 0 0 1,666 II Financial Sector** 3,110 5,154 0 39,624 47,888 1 Multilateral 0 570 0 0 570 2 Bilateral 0 1,110 0 0 1,110 3 Export Credit 0 140 0 0 140 4 Commercial 3,110 3,334 0 0 6,443 5 NRI Deposits 0 0 0 39,624 39,624 III Non-Financial Public Sector 1,594 6,413 7 0 8,013 1 Multilateral 0 2,107 0 0 2,107 2 Bilateral 0 1,934 0 0 1,934 3 Export Credit 0 1,415 7 0 1,421 4 Commercial 1,594 674 0 0 2,268 5 Rupee Dept 0 283 0 0 283 IV Non-Financial Private Sector 11,491 26,412 651 0 38,553 1 Multilateral 0 126 0 0 126 2 Bilateral 0 608 0 0 608 3 Export Credit 0 3,675 651 0 4,326 4 Commercial 11,491 22,002 0 0 33,489 V Total Long-Term Debt 16,767 84,931 1,740 39,624 143,062 1 Multilateral 0 35,641 0 0 35,641 2 Bilateral 0 16,103 0 0 16,103 3 IMF 0 0 0 0 0 4 Export Credit 0 5,230 1,740 0 6,969 5 Commercial 16,767 26,010 0 0 42,776 6 NRI Deposits 0 0 0 39,624 39,624 7 Rupee Debt 0 1,949 0 0 1,949 Note: The Central Bank, i.e. RBI, has no external debt liability. *: Commercial external borrowings by the Central Government represent FII investment under the 100 per cent route in domestic debt securities and treasury bills. **: Financial sector includes financial development institutions, commercial banks and non-banking financial companies. Borrowings by State Bank of India like RIBs and India Development Bonds are also included. 15

4.4 Concessional Debt 4.4.1 The concessionality of a loan measures the soft terms and conditions at which the loan is obtained, as compared to the prevailing market conditions. Generally, concessional loans are those which carry an original grant element of 25 per cent or more as defined by the Development Assistance Committee (DAC) of the Organisation for Economic Cooperation and Development (OECD). Besides, loans from major regional development banks like the Asian Development Bank (ADB), and the World Bank are classified as concessional, according to each institution s classification and not as per the definition of DAC. In the Indian context, loans from multilateral institutions such as the International Development Association (IDA), International Fund for Agriculture Development (IFAD), and Organisation of Petroleum Exporting Countries (OPEC) are considered as concessional loans. Moreover, all government borrowings from bilateral sources (except dollar denominated debt from Russia) and rupee debt, which is serviced through exports, are treated as concessional. The loans from multilateral sources, such as the International Bank for Reconstruction and Development (IBRD), ADB and others, are on terms close to market rates and are, therefore, classified as non-concessional. 4.4.2 The share of concessional debt in total debt has been falling steadily in recent years. Although in absolute terms, concessional debt recorded an increase from US$ 39.46 billion at end-march 2006 to US$ 39.92 billion at end-march 2007, in terms of its share in total debt, concessional debt declined from 31.2 per cent to 25.7 per cent over the same period (Table 4.4). Table 4.4 : Share of Concessional Debt At end-march Debt 1991 1996 2001 2002 2003 2004 2005R 2006R 2007QE (US$ billion) Concessional Debt 38.43 41.94 35.89 35.52 38.61 40.28 41.05 39.46 39.92 Total External Debt 83.80 93.73 101.33 98.84 104.91 111.65 124.16 126.48 155.03 (per cent) Concessional Debt as Share of total debt 45.9 44.7 35.4 35.9 36.8 36.1 33.1 31.2 25.7 R: Revised; QE: Quick Estimates. 4.4.3 However, a comparison of the share of concessional debt in total debt of the top ten debtor countries as published by Global Development Finance, 2007, World Bank reveals that the share of concessional debt in total debt for India is the highest (Figure 4.1). 16

40.0 Figure 4.1: International Comparison - Share of Concessional Debt in Total Debt, 2005 Figuere 4.1: International Comparison: Share o f conces sional debt in total debt, 2005 35.0 33.6 30.0 25.0 26.0 Ratio 20.0 15.0 11.8 10.0 5.0 0.0 0.0 Russian Federat ion 0.9 1.1 1.1 1.4 1.6 2.3 Mexico Argent ina Hungary Poland Brazil Turkey China Indonesia India Source: Global Development Finance, 2007, World Bank. Count ries 4.5 Currency Composition 4.5.1 Continuing with the past trend, US dollar denominated debt accounted for the largest share in India s external debt portfolio. Between 2002 and 2007, its share varied in the range of 41 per cent and 54 per cent, being 49.1 per cent at end-march 2007. The share of important currencies in India s total external debt is given in Table 4.5. Table 4.5: Currency Composition of External Debt At end-march (percentage share in total external debt) Currency 2001 2002 2003 2004 2005R 2006R 2007QE 1 2 3 4 5 6 7 8 US Dollar 55.0 54.3 46.6 40.5 44.3 45.4 49.1 SDRs 12.8 14.1 15.2 15.5 15.2 14.9 13.3 Indian Rupees 12.4 11.9 17.3 22.7 21.0 19.7 17.4 Japanese Yen 10.1 10.2 10.7 11.6 11.2 11.9 12.9 Euro 5.8 5.7 6.2 5.8 4.9 4.8 4.4 Pound Sterling 2.9 2.9 3.0 3.4 2.8 2.8 2.6 Others 1.0 0.9 1.0 0.5 0.6 0.5 0.3 Total: 100.0 100.0 100.0 100.0 100.0 100.0 100.0 R: Revised ; QE: Quick Estimates. 17

5. DEBT SERVICING 5.1 Debt Service Payments 5.1.1 The sustainability of external debt is often gauged by the debt service ratio, as measured by the proportion of gross debt service payments to external current receipts. A large amount of debt service payments relative to foreign exchange reserves and external current receipts quite often leads to Balance of Payments (BOP) problems. Bunching of debt service payments tends to affect foreign exchange cash flow. Thus, monitoring of debt service payments and projections of future payment liabilities assume importance both from the point of view of effective external debt management and foreign exchange reserve management. 5.1.2 External debt service payments, which more than doubled from US$ 9.2 billion in 2004-05 to US$ 19.6 billion in 2005-06 due to redemption of India Millennium Deposits (IMD) (US$ 7.1 billion), softened to US$ 11.8 billion in 2006-07 (Table 5.1) (Annex VII). The debt service ratio too, which had jumped up to 9.9 per cent in 2005-06, came down steeply to 4.8 per cent in 2006-07, reflecting a moderation in debt service payments combined with expansion in external current receipts (Figure 5.1). The ratio of interest payments to current receipts too came down from 2.7 per cent during 2005-06 to 1.8 per cent in 2006-07. The relatively lower interest outgo on account of loans under external assistance reflected the favourable impact of concessional loans in the sovereign debt portfolio. Table 5.1 : India's External Debt Service Payments (US $ million) April-March Component 2000-01 2001-02 2002-03 2003-04 2004-05R 2005-06R 2006-07QE 1 2 3 4 5 6 7 8 1. External Assistance @ 3,444 3,225 7,165 6,983 2,855 2,652 2,685 Repayments 2,338 2,150 6,037 6,193 2,129 1,945 1,958 Interest 1,106 1,075 1,128 790 726 707 727 2. External Commercial Borrowing 7,073 5,563 6,186 10,164 4,530 14,839 6,979 Repayments 5,378 4,107 5,019 8,045 3,571 11,824 5,207 Interest 1,695 1,456 1,167 2,119 959 3,015 1,772 3. I. M. F. 26 0 0 0 0 0 0 Repayments 26 0 0 0 0 0 0 Interest 0 0 0 0 0 0 0 4. NRI Deposits 1,661 1,808 1,414 1,642 1,353 1,497 1,969 Interest 1,661 1,808 1,414 1,642 1,353 1,497 1,969 5. Rupee Debt Service 617 519 474 376 417 572 162 Repayments 617 519 474 376 417 572 162 Total Debt Service (1 to 5) 12,821 11,115 15,239 19,165 9,155 19,560 11,795 Repayments 8,359 6,776 11,530 14,614 6,117 14,341 7,327 Interest 4,462 4,339 3,709 4,551 3,038 5,219 4,468 Current Receipts# 77,467 80,982 95,248 119,239 153,381 196,778 245,715 Debt Service Ratio (%) 16.6 13.7 16.0 16.1 6.0 9.9 4.8 Ratio of Interest Payments to Current Receipts 5.8 5.4 3.9 3.8 2.0 2.7 1.8 R: Revised; QE: Quick Estimates. @ : Inclusive of non-government account figures supplied by the office of Controller of Aid Accounts & Audit, Ministry of Finance #: Current receipts exclude official transfers. 18