INDIA S EXTERNAL DEBT

INDIA S EXTERNAL DEBT A Status Report 2009-10 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS EXTERNAL DEBT MANAGEMENT UNIT AUGUST 2010 www.finmin.nic.in

ÉÊ ÉkÉ àéæjééò ÉÉ ié xé<ç ÉÊnããÉÉÒ-110001 FINANCE MINISTER INDIA NEW DELHI-110001 FOREWORD It gives me great pleasure to present the sixteenth edition of India s External Debt: A Status Report: 2009-10. The current issue presents a detailed analysis of debt position covering the period up to end of March, 2010 and includes separate sections on trends and composition of India s external debt since 1990 and an analysis of the role of debt in the global and the euro zone crisis with a perspective on the Indian situation. 2. India s external debt scenario has shown considerable improvement over time. International comparison based on World Bank s Global Development Finance, 2010 shows India s comfortable external debt position vis-à-vis other developing countries. This is an indication of India s active debt management policy, the main planks of which, inter alia, include regular monitoring of long and short-term debt, raising sovereign loans on concessional terms with longer maturities and rationalizing external commercial borrowings (ECB). The ECB guidelines are reviewed regularly to keep in tune with the evolving macroeconomic and changing market conditions. 3. The active external debt management policy of the Government has helped to keep external debt at sustainable level, with external debt-gdp ratio at 18.9 per cent and debt service ratio at 5.5 per cent in 2009-10. While the liberalization of ECB policy provided cushion against the decline in capital flows during 2008-09, the cautious approach also helped prevent the build-up of unsustainable debt burden in the pre-crisis era, which could have strained the corporate balance sheets during the crisis. The ECB policy therefore has been an effective intervention tool for managing surge and reversal of capital flows. 4 I hope that the Report would be useful for the Hon ble Members of Parliament, research scholars, policy makers and the general public in understanding and analyzing issues relating to external debt of the country. New Delhi (PRANAB MUKHERJEE) August 2010 Finance Minister

CONTENTS Page No. List of Abbreviations (v) 1 Overview 1 2 Classification of External Debt 3 2.1 Stock of External Debt 3 2.2 Creditor Classification 4 2.3 Borrower Classification 7 2.4 Instrument-wise Classification 8 2.5 Currency Composition 9 2.6 Concessional Debt 12 2.7 Summary 12 3 Short-term External Debt 13 3.1 Introduction 13 3.2 India s short-term debt 13 3.3 Short-term External debt by Original Maturity 13 3.4 Short-term External debt by Residual Maturity 14 3.5 Summary 15 4 Debt Service 16 4.1 Introduction 16 4.2 Debt Service Payments and Debt Service Ratio 16 4.3 Terms of Borrowings 20 4.4 Projections of Debt Service Payments 20 4.5 Summary 21 5 International Comparison 22 5.1 Introduction 22 5.2 External Debt of Developing Countries 22 5.3 India s External Debt 23 5.4 Summary 26 6 Sovereign External Debt 27 6.1 Introduction 27 6.2 Composition of Sovereign External Debt 27 6.3 Currency Composition 29 6.4 Debt Service 30 6.5 Explicit Contingent Liability 31 6.6 Projections of Debt Service on Government Account 32 6.7 Central Assistance to State Governments for Externally-aided projects 34 6.8 Summary 34

(ii) Page No. 7 Trends and Composition of India s External Debt: 1990-2010 35 7.1 Background 35 7.2 Structure of India s External Debt 35 7.3 Select External Debt Indicators 40 7.4 Summary 46 8 Global and Euro Zone Debt Crisis: Perspective and Lessons 47 8.1 Introduction 47 8.2 Role of Debt in Global Crisis 47 8.3 Sovereign Debt and the Euro Zone Crisis 48 8.4 India s External Debt and Global Crisis 48 8.5 India s Sovereign Debt 48 Box 2.1 Rupee Denominated Debt 11 Figures 2.1 Creditor Classification of External Debt at end-march 2005 (per cent) 5 2.2 Creditor Classification of External Debt at end-march 2010 (per cent) 6 2.3 Share of Long Term Debt of Financial, Public and Private Sectors in Total Non-Government External Debt (per cent) 8 2.4 Currency Composition of External Debt at end-march 2005 (per cent) 10 2.5 Currency Composition of External Debt at end-march 2010 (per cent) 10 3.1 Components of Short-term Debt at end-march 2010 (per cent) 13 3.2 Residual Maturity Short-term Debt Indicators (per cent) 15 4.1 India s Debt Service Ratio (per cent) 16 4.2 India s External Debt Service Payments (US$ billion) 17 4.3 Composition of India s External Debt Service Payments 18 4.4 Projected Debt Service Payments during 2010-11 to 2019-20 21 5.1 International Comparison of Change in External Debt Stock between 2000 and 2008 (per cent) 23 5.2 International Comparison of Ratio of Short-term to Total External Debt, 2008 (per cent) 25 5.3 International Comparison Share of Concessional Debt in Total External Debt, 2008 26 6.1 Composition of Sovereign Multilateral Debt at end-march 2010 (per cent) 28 6.2 Composition of Sovereign Bilateral Debt at end-march 2010 (per cent) 29 6.3 Currency Composition of India s Sovereign External Debt at end-march 2006 (per cent) 30 6.4 Currency Composition of India s Sovereign External Debt at end-march 2010 (per cent) 30 6.5 Projections of External Debt Service Payments to Multilateral Creditors (US$ million) 33 6.6 Projections of External Debt Service Payments to countries (US$ million) 33

(iii) Page No. 7.1 Trends in Short and Long Term Components of External Debt (US$ Million) 35 7.2 Composition of India s Long Term External Debt (per cent of total external debt) 36 7.3 Government and non-government Debt as a share of Total External debt (per cent) 36 7.4 Composition of Multilateral Debt (per cent) 37 7.5 Composition of Bilateral Debt (per cent) 37 7.6 Changing Composition of non-government External Debt 38 7.7 Changing Currency Composition of External Debt (per cent) 39 7.8 Changing Currency Composition of Sovereign External Debt (per cent) 39 7.9 India s External Debt to GDP ratio (per cent) 40 7.10 External Debt to Current Receipts (per cent) 41 7.11 Ratio of Short-Term to Total External Debt as per old and new Definitions (per cent) 42 7.12 Short-term Debt to Foreign Exchange Reserves (per cent) 43 7.13 Concessional Debt to Total External Debt (per cent) 44 7.14 Share of Official and Private Creditors in India s External Debt (per cent) 44 7.15 Debt Service Ratio (per cent) 45 7.16 Principal and Interest Repayments (US$ Million) 46 Text Tables 1.1 India s Key External Debt Indicators 2 2.1 India s External Debt Stock (2005-10) 3 2.2 Composition of External debt 4 2.3 Creditor Classification of External Debt 5 2.4 Share of Official and Private Creditors in External Debt 6 2.5 External Debt By Borrower Classification 7 2.6 Composition of Non-Government External Debt 8 2.7 Instrument-wise Classification of External Debt at end-march 2010 9 2.8 Currency Composition of External Debt 9 2.9 Share of Concessional Debt in Total External Debt 12 3.1 Short-term Debt by Original Maturity 14 3.2 Short-term Debt by Residual Maturity 15 4.1 India s External Debt Service Payments 16 4.2 India s External Debt Service Payments Based on Creditor Category 18 4.3 Disbursements and Principal Repayments under Short-term Debt 19 4.4 Implicit Interest Rate on India s External Debt 20 4.5 Average terms of new commitments for India 20 4.6 Projected Debt Service Payments 21 5.1 External Debt of Developing countries: Key Indicators 22 5.2 Share of Public and Private Sector in Long-term External Debt of Developing Counties 23 5.3 International Comparison of Top Twenty Developing Debtor Countries, 2008 24 5.4 Present Value based Indicators of Top twenty Developing Debtor Countries, 2008 25

(iv) 6.1 India s Sovereign External Debt 27 6.2 Currency Composition of Sovereign External Debt 29 6.3 Sovereign External Debt Service Payments 31 6.4 Central Government Credit Guarantees on External Debt 32 6.5 Creditor-wise Projections of External Debt Service Payments under Government Account 32 6.6 External Assistance to States (on back to back basis loans) on Government Account 34 7.1 Prepayment of Government and Non-Government Credits to Multilateral and Bilateral Institutions 38 7.2 Growth Rates of Debt Stock and GDP at Market Prices 40 7.3 Growth Rates of Debt Stock and External Current Receipts 41 7.4 Short Term External Debt by Old and New Definitions 42 Annex I External Debt : Definition, Concepts and Dissemination of Data 50 II Key External Debt Indicators (per cent) 53 III India s External Debt Outstanding - Annual ( ` Crore) 54 IV India s External Debt Outstanding -Annual (US$ million) 60 V India s External Debt Outstanding -Quarterly ( ` Crore) 66 VI India s External Debt Outstanding -Quarterly (US$ million) 71 VII External Debt by Borrower Categories (US$ million) 76 VIII Instrument-wise classification of long-term external debt outstanding at end-march 2010 77 IX Currency Composition of India s External Debt (per cent) 78 X Short-term debt by remaining maturity 79 XI India s External Debt Service Payments- Source-wise 80 XII India s External Debt Service Payments- by Creditor Categories 81 XIII International Comparison of Top Twenty Developing Debtor Countries, 2008 82 XIV Gross External Debt positions for selected countries (QEDS) 83 XV Creditor-wise Sovereign External Debt ( ` Crore) 84 XVI Creditor-wise Sovereign External Debt (US$ million) 85 XVII Currency Composition of Sovereign External Debt 86 XVIII Sovereign External Debt Service Payments (Actual) 87 XIX Central Government Credit Guarantees on External Debt 88 XX Creditor wise projections of External Debt Service Payments under Government Account 89 XXI Debt service projections of States under External Assistance 90 XXII Policy Measures related to External Commercial Borrowings (ECBs) 92

(v) LIST OF ABBREVIATIONS AAAD AD ADB BoP CDO CDS CS-DRMS CUB DEA ECB EDMU EU FCA FCCB FC(B&O)D FCNR(A) FCNR(B) FDI FIIs FOREX GDF GDP GDR GDDS GNI HDFC HUDCO IBRD ICICI IDA IFAD IFCs IFC (W) IMD IMF IPCL Aid Accounts & Audit Division Authorised Dealers Asian Development Bank Balance of Payments Collateralised Debt Obligation Credit Default Swap Commonwealth Secretariat- Debt Recording and Management System Committed Undisbursed Balance Department of Economic Affairs External Commercial Borrowings External Debt Management Unit European Union Foreign Currency Assets Foreign Currency Convertible Bond Foreign Currency (Banks & Other) Deposit Foreign Currency Non-Resident Account Foreign Currency Non-Resident Bank Deposit Foreign Direct Investment Foreign Institutional Investors Foreign Exchange Reserves Global Development Finance Gross Domestic Product Global Depositry Receipts General Data Dissemination System Gross National Income Housing Development Finance Corporation Ltd. Housing and Urban Development Corporation Ltd. International Bank for Reconstruction and Development Industrial Credit and Investment Corporation of India International Development Association International Fund for Agricultural Development Infrastructure Finance Companies International Finance Corporation (Washington DC) India Millennium Deposit International Monetary Fund Indian Petrochemicals Corporation Ltd.

(vi) LBO LIBOR MOF NBFC NRI NR(E)RA NR (NR) D NRO NSA OECD ONGC OPEC PIO PR PSU PV QE QEDS RBI RIB SDDS SDR SEBI SED SLR TB TC XGS Leveraged Buyouts London Inter-Bank Offer Rate Ministry of Finance Non-Banking Finance Companies Non-Resident Indian Non-Resident (External) Rupee Account Non-Resident (Non-Repatriable) Rupee Deposit Non-Resident Ordinary Account Not separately available Organisation for Economic Cooperation and Development Oil and Natural Gas Corporation Organisation of the Petroleum Exporting Countries Persons of Indian Origin Partially Revised Public Sector Undertaking Present Value Quick Estimates Quarterly External Debt Statistics Reserve Bank of India Resurgent India Bonds Special Data Dissemination Standards Special Drawing Rights Securities and Exchange Board of India Sovereign External Debt Statutory Liquidity Ratio Treasury Bill Trade Credit Exports of Goods and Services India s External Debt: A Status Report 2009-10" is prepared by the External Debt Management Unit of the Department of Economic Affairs, Ministry of Finance under the overall direction of Chief Economic Adviser (Dr. Kaushik Basu). The Unit led by Economic Adviser (Shri Anil Bisen) comprises Additional Economic Adviser (Shri Sunil Saran), Officer on Special Duty (Dr. Rajmal) and Assistant Director (Shri Rangeet Ghosh). Dr. Bhagwan Das, Research Officer, Shri Krishan Kumar and Smt. Meera Mamgaain were responsible for data compilation. The Hindi Section has provided valuable support in translation and Budget Press in Desktop publishing (DTP) and printing work.

CHAPTER 1 OVERVIEW 1.1 India's external debt increased from US$ 224.5 billion at end-march 2009 to US$ 261.5 billion at end-march 2010. The total increase was US$ 37.0 billion (16.5 per cent). The rise could largely be attributed to long-term components like external commercial borrowings, NRI deposits and Special Drawing Rights (SDR) allocated by the International Monetary Fund (IMF). The valuation effect arising from depreciation of the US dollar against major international currencies contributed 17.8 per cent (US$ 6.6 billion) to the increase. 1.2 The long-term debt at US$ 209.0 billion at end-march 2010, accounted for about 80 per cent of the total external debt. The long-term debt increased by 15.4 per cent over the level at end-march 2009, while short-term debt rose by 21.0 per cent. 1.3 Government (sovereign) external debt stood at US$ 67.1 billion at end-march 2010, higher by US$ 11.2 billion (20 per cent) over its level of US$ 55.9 billion at end-march 2009. It accounted for 25.7 per cent of the total external debt as compared to 24.9 per cent at end-march 2009. Government guaranteed external debt was marginally higher at US$ 7.7 billion (US$ 6.8 billion at end-march 2009). 1.4 As per the World Bank publication 'Global Development Finance, 2010', India was at fifth position among top twenty developing indebted countries in 2008 in terms of stock of external debt, after Russian Federation, China, Turkey and Brazil. In terms of the ratio of external debt to Gross National Income (GNI), India's position was the fourth lowest, with China having the lowest ratio of external debt to GNI. The share of concessional credit in India's external debt portfolio was the fourth highest after Pakistan, Indonesia and the Philippines. 1.5 The analysis of trends since 1990s shows that India's external debt position has improved significantly over time with debt-gdp ratio falling from 38.7 per cent in 1991-92 to 18.9 per cent in 2009-10 and debt service ratio declining from 30.2 per cent to 5.5 per cent (Annex II). The composition of external debt has also undergone change with shares of both multilateral and bilateral components showing a declining trend in long term external debt. There is an increasing share of private players in India's total external debt from around 40 per cent in the first half of the nineties to over 70 per cent in the recent years. The share of the Government, the main borrower from bilateral and multilateral sources, has correspondingly declined from the mid-nineties onwards. 1.6 The key debt sustainability indicators suggest that India's external debt remains at a comfortable level. The summary of key indicators is set out in Table 1.1. India's foreign exchange reserves provided a cover of 106.7 per cent to the external debt stock as at end-march 2010 vis-à-vis 112.2 per cent at end-march 2009. The share of short-term debt in total external debt was 20.1 per cent at end-march 2010, marginally higher than 19.3 per cent at end-march 2009.

2 At end March External Debt (US$ billion) Table 1.1: India s Key External Debt Indicators Ratio of External Debt to GDP Debt Service Ratio Ratio of Foreign Exchange Reserves to Total Debt Ratio of Concessional Debt to Total Debt Ratio of Short-term Debt to Foreign Exchange Reserves (Per cent) Ratio of Shortterm Debt to Total Debt 1 2 3 4 5 6 7 8 2005-06 139.1 16.7 10.1 a 109.0 28.4 12.9 14.0 2006-07 172.4 17.5 4.7 115.6 23.0 14.1 16.3 2007-08 224.4 18.1 4.8 138.0 19.7 14.8 20.4 2008-09 PR 224.5 20.5 4.4 112.2 18.7 17.2 19.3 2009-10 QE 261.5 18.9 5.5 106.7 16.8 18.8 20.1 PR: Partially Revised; QE: Quick Estimates. a: Works out to 6.3 per cent, excluding India Millennium Deposit repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million. 1.7 The external debt management policy of Government of India continues to focus on monitoring long and short-term debt, raising sovereign loans on concessional terms with longer maturities, regulating external commercial borrowings through end-use and all-in-cost restrictions, and rationalizing interest rates on Non-Resident Indian (NRI) deposits. 1.8 The sovereign debt crisis in the euro zone has highlighted the importance of composition, maturity profile and investor base in precipitating a debt crisis. While India's external debt remains at a comfortable level due to the active debt management policy, the nature of sovereign debt is also fundamentally different from many advanced countries. The composition of Central Government s public debt shows that the bulk of sovereign debt is from domestic sources (about 89 per cent), and external debt accounts for about 11 per cent, most of which is from multilateral/ bilateral sources. In domestic debt category also, a significant share of dated securities (about 70 per cent of total public debt) are owned by commercial and co-operative banks (around 51 per cent) and insurance companies (22 per cent). Given the composition of public debt and the fact that a sizeable share of banking and insurance sector is in the public sector, the refinancing risk that has been at the root of the euro zone crisis, is at best minimal. 1.9 The Report comprises eight Chapters including an Overview. Chapter 2 deals with classification of external debt. An analysis of short-term external debt is in Chapter 3. Chapter 4 covers debt servicing of India's external debt. International comparison of top twenty developing debtor countries is discussed in Chapter 5. Chapter 6 gives the details of sovereign external debt of India while Chapter 7 assesses the trends and composition of external debt of India during the period 1990-2010. Finally, Chapter 8 analyzes the global and euro zone debt crisis with a perspective on Indian situation.

3 CHAPTER 2 CLASSIFICATION OF EXTERNAL DEBT 2.1 Stock of External Debt 2.1.1 External debt of a country indicates contractual liability of residents to non-residents. In rupee terms, India's external debt of Rs. 1,180,073 crore at end March 2010, registered a rise of Rs. 36,283 crore (3.2 per cent) over the end-march 2009 estimates. In US dollar terms, external debt stood at US$ 261.5 billion at end-march 2010, showing a rise of 16.5 per cent over the end-march 2009 figures (Table 2.1). The valuation effect, reflecting the change in the value of the US dollar against major international currencies in which country's external debt is denominated, accounted for a rise of US$ 6.6 billion in the debt stock. Excluding the valuation effect, the stock of external debt as at end-march 2010 would have increased by US$ 30.4 billion during the year. Table 2.1: India s External Debt Stock (2005-10) Unit at end-march 2005 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 Rupees crore 586,305 620,522 751,402 897,290 1,143,790 1,180,073 US Dollar million 134,002 139,114 172,360 224,407 224,515 261,454 Debt to GDP Ratio 18.1 16.7 17.5 18.1 20.5 18.9 PR: Partially Revised, QE: Quick Estimates. 2.1.2 Table 2.2 provides a break-up of the total external debt stock into long and short-term components. During 2009-10, excluding the head 'IMF' 1, short term debt contributed the highest (21.0 per cent growth) to the rise in total external debt, followed by export credit (16.5 per cent), long-term NRI Deposit (15.7 per cent) and commercial borrowings (13.7 per cent). The pick-up in export credits and commercial borrowings in 2009-10 are indication of the ongoing process of recovery in the aftermath of the global financial crisis. 1 The increase under the head IMF is on account of Special Drawing Rights (SDR) allocations of SDR 3082.5 million on August 28, 2009 and SDR 214.6 million on September 9, 2009 and the consequent increase in cumulative SDR allocations to US$ 6.2 billion at end-december 2009. SDR allocations fall in the category of long-term reserve-related liability of the country to the other participants of the IMF s SDR Department and according to the rules prescribed in the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) is included as debt liability.

4 Table 2.2 : Composition of External Debt (US$ million) at end March Variation (Absolute) Sl Components 2008 2009 PR 2010 QE March 2008 to March 2009 to No. March 2009 (4-3) March 2010 (5-4) 1 2 3 4 5 6 7 1 Multilateral 39,490 39,538 42,733 48 (0.1) 2 Bilateral 19,708 20,613 22,596 905 (4.6) 3 IMF 1,120 1,018 6,041 (- 102 (- 9.1) 4 Export Credit 10,328 14,490 16,878 4,162 (40.3) 5 Commercial Borrowings 62,334 62,413 70,986 79 (0.1) 6 NRI Deposits (long-term) 43,672 41,554 48,092-2,118 (- 4.8) 7 Rupee Debt 2,017 1,527 1,657-490 (- 24.3) 8 Total Long-term Debt (1 to 7) 178,669 181,153 208,983 2,484 (1.4) 9 Short-term Debt 45,738 43,362 52,471-2,376 (-5.2) 10 Total External Debt (8+9) 224,407 224,515 261,454 108 (0.05) PR: Partially Revised, QE: Quick Estimate. Figures within parenthesis indicate percentage variation. 3,195 (8.1) 1,983 (9.6) 5,023 (493.4) 2,388 (16.5) 8,573 (13.7) 6,538 (15.7) 130 (8.5) 27,830 (15.4) 9,109 (21.0) 36,939 (16.5) 2.1.3 The component wise details of external debt, since 1990 in Rupees crore is given at Annex III and in US$ million at Annex IV. The quarterly external debt outstanding since 2004, in Rupees crore and in US$ million is contained in Annex V and VI, respectively. 2.2 Creditor Classification 2.2.1 At end-march 2010, commercial borrowings accounted for the highest share in total external debt at 27.2 per cent, followed by short-term debt (20.1 per cent), NRI deposits (18.4 per cent), multilateral (16.3 per cent), bilateral (8.6 per cent), export credits (6.5 per cent), IMF (2.3 per cent) and rupee debt (0.6 per cent) (Table 2.3). 2.2.2 Between 2005 and 2010, the share of multilateral and bilateral credits in total external debt declined from 36.4 per cent at end March 2005 to 24.9 per cent at end-march 2010, while deposits from non-resident Indians declined from 24.4 per cent in 2005 to 18.4 per cent. However, commercial borrowings increased by around 169 per cent during the period (Annex IV), with a corresponding increase in its share in total external debt from 19.7 per cent to 27.2 per cent. Figure 2.1 and 2.2 depicts the creditor-wise share of total external debt at end-march 2005 and 2010, respectively.

5 Table 2.3: Creditor Classification of External Debt (Per cent) at end March Sl. Category 2005 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 8 1 Multilateral 23.7 23.4 20.5 17.6 17.6 16.3 2 Bilateral 12.7 11.3 9.3 8.8 9.2 8.6 3 IMF 0.8 0.7 0.6 0.5 0.5 2.3 4 Export Credits 3.8 3.9 4.2 4.5 6.5 6.5 5 Commercial Borrowings 19.7 19.0 24.0 27.8 27.7 27.2 6 NRI Deposits 24.4 26.1 23.9 19.5 18.5 18.4 7 Rupee Debt 1.7 1.5 1.1 0.9 0.7 0.6 8 Total Long-term Debt 86.8 85.9 83.6 79.6 80.7 79.9 (1 to 7) 9 Short-term Debt 13.2 14.1 16.4 20.4 19.3 20.1 10 Grand Total (8+9) 100 100 100 100 100 100 PR: Partially Revised, QE: Quick Estimate. Mult Figure 2.1 : Creditor Classification of External Debt as at end-march 2005 (Per cent) Short Term Debt (13.2) Multilateral (23.7) Rupee Debt (1.7) Bilateral (12.7) NRI Deposits (24.4) IMF (0.8) Commercial Borrowings (19.7) Export Credits (3.8)

6 Figure 2.2 : Creditor Classification of External Debt at end-march 2010 (Per cent) Short Term Debt (20.1) Multilateral (16.3) Rupee Debt (0.6) Bilateral (8.6) IMF (2.3) Export Credits (6.5) NRI Deposits (18.4) Commercial Borrowings (27.2) 2.2.3 Over the years, the share of official creditors in total external debt has declined; the decline was 10.2 percentage points between end-march 2005 and end-march 2010 with private creditors accounted for the bulk (70.5 per cent) of India's external debt (Table 2.4). Table 2.4: Share of Official and Private Creditors in External debt (Per cent) At end March Official Creditors Private Creditors 1 2 3 2005 39.7 60.3 2006 37.7 62.3 2007 32.2 67.8 2008 28.4 71.6 2009 PR 28.5 71.5 2010 QE 28.5 71.5 PR: Partially Revised; QE: Quick Estimates. Note:1 Official creditors include multilateral and bilateral sources of finance, loans and credits obtained from IMF, export credit component of bilateral credit, export credit for defence purposes and rupee debt. 2 Private creditors denote sources of loans raised under ECBs, NRI deposits, export credits (other than those included under official creditors) and short-term debt.

2.3 Borrower Classification 7 2.3.1 The borrower classification of external debt provides breakup into Government (Sovereign) and non-government debt (Table 2.5). The latter is further categorized into financial, public and private sectors. Non-Government debt has continued to increase in terms of its share in total external debt. At end-march 2010, non-government debt was around three-fourths of total external debt at 74.3 per cent. Details of Borrower classification of external debt since 1991 are provided in Annex VII and analyzed in Chapter 7. Table 2.5: External Debt by Borrower Classification (US$ million) Sl. at end-march Components 2005 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 8 I. Government Debt (A+B) 47,697 46,259 49,360 58,068 55,874 67,064 A. Of which long-term (1+2): 46,538 46,119 49,034 57,453 54,935 65,546 1 Govt. Account 43,686 43,510 46,155 52,538 51,816 55,232 2 Other Govt. Debt 2,852 2,609 2,879 4,915 3,119 10,314 B. Of which short-term: 1,159 140 326 615 939 1,518 II. Non-Government Debt 86,305 92,855 123,000 166,339 168,641 194,390 (C+ D) C. Of which long-term 69,741 73,456 95,196 121,216 126,218 143,437 (1+2+3): 1 Fina ncial Sector 1 43,455 42,334 48,414 51,138 48,858 56,252 2 Public Sector 2 6,496 6,671 7,978 11,040 12,356 14,581 3 Private Sector 3 19,790 24,451 38,804 59,038 65,004 72,604 D. Of which short-term: 16,564 19,399 27,804 45,123 42,423 50,953 III. Total External Debt (I+II) 134,002 139,114 172,360 224,407 224,515 261,454 Memo Items: Share of Government debt in total debt (%) Share of Non- Government debt in total d ebt (% ) Ratio of Government debt to GDP (% ) 35.6 33.3 28.6 25.9 24.9 25.7 64.4 66.7 71.4 74.1 75.1 74.3 6.3 5.4 5.0 4.7 5.1 4.9 PR: Partially Revised; QE: Q uick Estimate s. 1: Financial sector represents borrowings by banks and financial institutions and also long-term NRI Deposits. 2: Public sector debt represents borrowings of non- financial public sector enterprises. 3: Private sector debt represents borrowings of non- financial private sector enterprises. 2.3.2 The share of the financial, private and public sector in total non-government external debt in Figure 2.3 reveals that while the share of public sector in total long term non-government debt has remained steady around 7 per cent during the period 2005-10, the share of financial sector has fallen to 28.9 per cent at end-march 2010, as compared to the level of 50.4 per cent in 2005 (Table 2.6). This is due to the fact that access to overseas funds by the private sector has shown persistent rise over the 2007-10 periods (mainly on account of more liberal access to external commercial borrowings) vis-à-vis the financial sector. The private sector accounted for the highest (37.3 per cent) share in total non-government external debt at end-march 2010.

8 60 Figure 2.3: Share of Long Term Debt of Financial,Public and Private Sectors in Total Non-Government External Debt (per cent) 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Financial Year Table 2.6: Composition of Non-Government External Debt (per cent) at end-march Component/Sector 2005 2006 2007 2008 2009 2010 1 2 3 4 5 6 7 A Long-term Debt 80.8 79.1 77.4 72.9 74.8 73.8 of which i. Financial Sector 50.4 45.6 39.4 30.7 29.0 28.9 ii. Public Sector 7.5 7.2 6.5 6.6 7.3 7.5 iii. Private Sector 22.9 26.3 31.5 35.6 38.5 37.4 B Short-term Debt 19.2 20.9 22.6 27.1 25.2 26.2 Total (A+B) 100.0 100.0 100.0 100.0 100.0 100.0 2.4 Instrument-wise Classification Financial Public Private 2.4.1 The instrument-wise classification of external debt viz., bonds, loans, trade credits and deposits along with borrower details is in Table 2.7 and Annex VIII. The share of loans, which includes multilateral, bilateral and bank loans, was 49 per cent at end-march 2010, followed by deposits (20.7 per cent), trade credits (19 per cent) and bonds (11.3 per cent). 2.4.2 For the Government and the non-financial private sector, the bulk of the external debt is via loans, while deposits constitute the major instrument for the financial sector. Trade credits account for majority share in short term external debt.

9 Table 2.7: Instrument-wise Classification of External Debt at end-march 2010 (US$ million) Sl Borrowers Bonds Loans Trade Credits Deposits Total 1 2 3 4 5 6 7 I Government 3,026 (1.2) II Financial Sector 6,689 (2.6) III Non-Financial Public Sector 1,020 (0.4) IV Non-Financial Private Sector 13,882 (5.3) V Short-Term Debt 4,856 (1.9) VI Total External debt*** (I to V) 55,100 (21.1) 7,311 (2.8) 13,560 (5.2) 52,225 (20.0) 0.0 (0.0) 29,473 128,197 (11.3) 1 (49.0) 1,379* (0.5) 0.0 (0.0) 1.0 (0.0) 657 (0.3) 47,615 (18.2) 49,651 (19.0) * For the Government this signifies export credit component of bilateral external assistance. ** IMF SDR allocations have been classified as Deposits under the Government head. ***Items I to IV constitute Total Long term Debt. 1 Includes Money market instruments. Figures in parentheses denote percentage of the total external debt (US$ 261,454 million) 6,041** (2.3) 48,092 (18.4) 0.0 (0.0) 0.0 (0.0) 0.0 (0.0) 54,133 (20.7) 65,546 (25.1) 62,092 (23.8) 14,581 (5.6) 66,764 (25.5) 52,471 (20.1) 261,454 (100.0) 2.5 Currency Composition 2.5.1 The currency composition of India's external debt (Table 2.8 and Figures 2.4 and 2.5) reveals that the US dollar denominated debt remained dominant. The share of US dollar debt in total external debt was at 53.3 per cent at end-march 2010 (slightly less than the 54.1 per cent registered at end- March 2009), followed by the Indian rupee (18.7 per cent), Japanese yen (11.4 per cent) and SDR (10.7 per cent). Time series data on currency composition of external debt since 1994 is contained in Annex IX and analyzed in Chapter 7. Table 2.8: Currency Composition of External Debt Sl. Currency at end-march (per cent) 2005 2006 2007 2008 2009 PR 2010* QE 1 2 3 4 5 6 7 8 1 US Dollar 47.7 48.8 51.1 55.3 54.1 53.3 2 Indian Rupees 19.4 18.8 18.5 16.2 15.4 18.7 3 Japanese Yen 10.4 10.9 11.4 12.0 14.3 11.4 4 SDR** 14.9 14.3 12.4 10.6 9.8 10.7 5 Euro 4.6 4.4 3.9 3.5 4.1 3.6 6 Pound Sterling 2.6 2.6 2.4 2.2 2.0 1.8 7 Others 0.4 0.2 0.3 0.2 0.3 0.5 Total (1 to 7) 100.0 100.0 100.0 100.0 100.0 100.0 PR: Partially Revised; QE: Quick Estimates. * The figures for end-m arch 2010 result from denominating FII investment in rupees. ** The SDR was created by the IMF in 1969 to serve as an international reserve asset to supplement the official reserves of the member countries. The SDR valuation basket,w.e.f January 1,2006, consists of the following currencies with their associated weightages : US Dollar (44 per cent), Euro(34 per cent), Japanese Yen (11 per cent) and Pound Sterling (11 per cent) ( Source : IMF). The currency composition in Table 2.8 has SDR as a category. In case the currencies in the SDR basket are separately considered, the share of each currency in the Table would go up correspondingly.

10 Figure 2.4 : Currency Composition of External Debt at end-march 2005 (per cent) Euro (4.6) Pound Sterling (2.6) Others (0.4) SDRs(14.9) US Dollars (47.7) Japanese Yen (10.4) Indian Rupees (19.4) Figure 2.5 : Currency Composition of External Debt as at end-march 2010 (per cent) SDRs(10.7) Euro (3.6) Pound Sterling (1.8) Others (0.5) Japanese Yen (11.4) US Dollars (53.3) Indian Rupees (18.7)

11 Box 2.1 : Rupee denominated debt India's External Debt denominated in Rupees consist of the following categories:- i. Rupee Debt; The outstanding state credits (both defence and civilian) extended to India by the erstwhile Union of Soviet Socialist Republics (USSR). The debt is denominated in Rupees and repayment of such debt is made primarily through the export of goods to Russia; ii. iii. iv. Rupee Denominated NRI Deposits viz. the Non-Resident (External) Rupee Account {NR(E)RA} and the Non-Resident Ordinary Rupee (NRO) Accounts; FII Investments in Government Treasury Bills (TBs) and dated securities (with an annual ceiling of US$ 5 billion on such investments) and FII Investments in corporate debt securities (with an annual ceiling of US$ 15 billion on such investments). The NR(E)RA is categorized as an external debt liability since the principal amount held in such accounts as well as the interest accrued are repatriable. In case of the NRO Account, NRIs and Persons of Indian Origin (PIO) are eligible to annually remit an amount up to US$ 1 million out of the balances held in such accounts. Unlike foreign currency denominated debt, where the currency risk is borne by the borrower, the characteristic feature of domestic currency denominated debt is that the exchange risk is borne by the creditor. The contractual liability, however, is settled in terms of the designated foreign currency (through exports in case of Rupee debt owed to Russia).This implies that the borrower gains (and the creditor loses) when the local currency depreciates since less has to be repaid in foreign currency terms and vice versa. The table below shows the amount held under each of the above heads (i) to (iv). Rupee denominated debt at end-march 2010 (US$ million) S. No. Component Amount 1 2 3 1. COMMERCIAL BORROWINGS (a+b) 13,489 a) FII Investment in Treasury Bills/dated securities and corporate debt instruments* 12,222 b) Others 1,267 2. NRI DEPOSITS [(Above one year maturity (a+b)] 33,774 a) NR(E)RA 26,362 b) NRO Deposits 7,412 3. RUPEE DEBT (a+b) 1,657 a) Defence 1,486 b) Civilian 171 4. GRAND TOTAL (1 to 3) 48,920 * Includes both short and long term.

12 2.6 Concessional Debt 2.6.1 Concessionality in external debt indicates softer terms of a loan in relation to the prevailing market conditions. Concessionality could be reflected in lower rate of interest, longer grace or repayment periods. It is measured by the difference between the face value of a credit and the sum of the discounted future debt service payments. 2.6.2 Different multilateral institutions follow different norms for classifying credits into concessional 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 30.7 per cent in 2005 to 16.8 per cent at end-march 2010 (Table 2.9). Table 2.9 : Share of Concessional Debt in Total External Debt Sl. Component at end-march (US$ million) 2005 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 8 1 Total external debt (2+3) 1,34,002 1,39,114 1,72,360 2,24,407 2,24,515 2,61,454 2 Concessional debt 41,107 39,559 39,567 44,164 41,903 43,926 3 Non-concessional debt 92,895 99,555 1,32,793 1,80,243 1,82,612 2,17,528 4 Concessional debt as share of total debt (per cent) 30.7 28.4 23.0 19.7 18.7 16.8 Note: Creditor classification approach is used for classifying debt as concessional. PR: Partially Revised; QE: Quick Estimates. 2.7 Summary 2.7.1 India's external debt increased by 16.5 per cent, from US$ 224.5 billion at end-march 2009 to US$ 261.5 billion at end-march 2010. The ratio between long and short-term debt was around 80:20 at end-march 2010. Among the long-term components, commercial borrowings accounted for the largest share followed by NRI deposits, multilateral, bilateral and export credit. The share of private creditors increased from 60.3 per cent in 2005 to 70.5 per cent at end-march 2010. The share of government debt was 25.7 per cent, while the share of non-government debt was 74.3 per cent in total external debt at end March 2010. US dollar denominated debt, with its share of 53.3 per cent at end-march 2010, continues to dominate India's total external debt. The element of concessionality in total external debt stood at 16.8 per cent at end-march 2010.

13 CHAPTER 3 SHORT-TERM EXTERNAL DEBT 3.1 Introduction 3.1.1 Short-term debt is an important component of external debt. Large and increasing magnitude of such debt may pose problems, especially in times of crisis, when access to international capital market is limited and the roll over or refinancing opportunities may not be easily forthcoming. The financial crisis in the emerging economies in the second half of 1990s underlined the importance of using short-term residual maturity external debt as a vulnerability indicator. The recent global financial crisis exhibit higher volatility for short-term flows vis-à-vis medium and long term flows. 3.2 India's Short-Term Debt 3.2.1 While the compilation of external debt statistics, based on original maturity helps in understanding the nature of debt flows, residual maturity is useful in assessing debt servicing obligations during the ensuing year. Short-term debt by residual maturity comprises all the components of short-term debt with original maturity of up to one year, and amounts falling due under long-term debt during the one year reference period. 3.3 Short-term External debt by Original Maturity 3.3.1 India's short-term external debt by original maturity has exhibited an upward trend, both in absolute terms and as a percentage of total external debt. This is, however, largely on account of revision in the coverage of short-term debt in recent years. The data on short-term debt includes: (i) Trade credit upto 180 days and above 180 days & upto 1 year (ii) Foreign Institutional Investor (FII) investments in Government Treasury Bills and corporate securities, (iii) investments by foreign central banks and international institutions in Treasury Bills and (iv) external debt liabilities of foreign central banks and commercial banks. 3.3.2 India's Short-term debt at end-march 2010 stood at US$ 52.5 billion, reflecting an increase of 21 per cent over end-march 2009 level. Trade related credits contributed 84 per cent of the total rise in short-term debt stocks at end-march 2010. The share of trade credit in short-term debt was 90.7 per cent at end-march 2010 as against 92.2 per cent at end-march 2009. The components and their share in total shortterm debt at end-march 2010 are in Figure 3.1 and Table 3.1. 3.3.3 At end-march 2010, trade credits outstanding at US$ 47.6 billion showed an increase of 19.1 per cent over at end-march 2009. At this level, it accounted for 15.9 per cent of total imports in 2009-10 as against 13.0 per cent in 2008-09. Figure 3.1: Components of Short-Term Debt at end-march 2010 (per cent) 6.4 0.2 1.3 1.3 Trade Credits FII Investment in Government Treasury Bills & Corporate securities Investment in Treasury Bills by Foreign Central Banks/International Institutions External Debt Liabilities of Central Bank External Debt Liabilities of Commercial Banks 90.7

Sl. No. Category 14 Table 3.1: Short-term Debt by Original Maturity at end-march (US$ million) 2005 2006 2007 2008 2009 PR 1 2 3 4 5 6 7 8 1 Short-term Debt (a to d) 17,723 19,539 28,130 45,738 43,362 52,471 a) Trade Credits 16,271 19,399 25,979 41,901 39,964 47,615 2010 QE 1) Above 6 months and up 7,529 8,696 11,971 22,884 23,346 28,002 to 1 year 2) Up to 6 months 8,742 10,703 14,008 19,017 16,618 19,613 b) FII investment in Govt. Treasury Bills and corporate securities c) Investment in Treasury Bills by foreign central banks and international Institutions, etc. 1,452 140 397 651 2065 3,357 - - 164 155 105 103 d) External debt liabilities of - - 1,590 3,031 1,228 1,396 1) Central Bank - - 501 1,115 764 695 2) Commercial Banks - - 1,089 1,916 464 701 2 Long-term debt 116,279 119,575 144,230 178,669 181,153 208,983 3 Total External Debt (1+2) Memo Items 134,002 139,114 172,360 224,407 224,515 261,454 A Imports(during the year) 118,908 157,056 190,670 257,629 307,651 299,491 B Ratio of Trade Credits to 13.7 12.4 13.6 16.3 13.0 15.9 Imports (%) C Ratio of Short-term to total debt (%) 13.2 14.0 16.3 20.4 19.3 20.1 PR: Partially Revised; QE: Quick Estimates. Notes: (i) 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. (ii) Data on short-term trade credits of less than six months in respect of suppliers credit are available beginning March 2005. (iii) Imports data are on balance of payments basis. 3.4 Short-term External Debt by Residual Maturity 3.4.1 Short-term debt by residual maturity comprises principal repayments due during a one-year reference period under long-term loans together with short-term debt of original maturity of one year or less. The residual maturity concept provides an indication of maturing debt obligations and the liquidity requirements to service contractual obligations within a year. 3.4.2 Based on residual maturity, India's short-term debt stood at US$ 66.8 billion as at the end- March 2010 (Table 3.2 and Figure 3.2). At this level, it accounted for 25.6 per cent of total external debt and 23.9 per cent of foreign exchange reserves. The details of short-term debt by remaining maturity since 1990 are given at Annex X.

15 Table 3.2: Short term Debt by Residual Maturity (US$ million) at end March Component 2005 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 1. Short-term Debt (Original Maturity) 17,723 19,539 28,130 45,738 43,362 52,471 2. Long-term debt obligations maturing within one year 14,341 5,936 8,340 8,994 13,241 14,350* 3. External debt (residual maturity) (1+2) 32,064 25,475 36,470 54,732 56,603 66,821 Per cent of GDP 4.4 3.0 3.9 4.4 4.7 5.1 Per cent to Total Debt 23.9 18.3 21.2 24.4 25.2 25.6 Per cent of foreign exchange reserves 22.7 16.8 18.3 17.7 22.5 23.9 PR: Partially Revised, QE: Quick Estimates. Note: (I) Estimates of long-term debt obligations maturing within one year have been calculated on post facto basis and includes repayments arising from prepayments of long-term debt. *: Long term debt maturing within one year (2010-11) has been calculated by aggregating projected debt service payments on debt outstanding as at 31 st March 2010. It excludes debt service on FII investment in Government / corporate securities and NRI deposits. Figure Figure 3.2: 3.2: Residual Residual Maturity Maturity Short Short-term Term Debt Debt Indicators Indicators (per (per cent) cent) 30 25 23.9 22.7 21.2 24.4 25.2 25.6 23.9 22.5 20 18.3 16.8 18.3 17.6 17.7 15 10 5 4.4 3.0 3.9 4.4 4.7 5.1 0 2005 2006 2007 2008 2009 2010 Per cent of GDP Per cent of Foreign Exchange Reserves Per cent of Total Debt 3.5 Summary 3.5.1 At end-march 2010, India's short-term original maturity debt accounted for 20.1 per cent of total external debt, marginally higher than 19.3 per cent at end-march 2009. The share of trade related credits in short-term debt stood at 90.7 per cent and contributed 84 per cent of the total increase in shortterm debt between end-march 2009 and end-march 2010. 3.5.2 On the basis of residual maturity, the share of short-term debt in total external debt was 25.6 per cent at end-march 2010 (25.2 per cent at end-march 2009). At this level, the ratio of residual maturity short-term debt to foreign exchange reserves stood at 23.9 per cent as against 22.5 per cent at end-march 2009.

4.1 Introduction 16 CHAPTER 4 DEBT SERVICE 4.1.1 Debt service payments and debt service ratio occupy a central place in debt analysis. Debt service ratio, as measured by the proportion of total debt service payments (i.e. principal repayment plus interest payment) to current receipts of Balance of Payments (BoP), is an indicator of debt sustainability. It indicates the claim that servicing of external debt makes on current receipts and is, therefore, a measure of strain on BoP due to servicing of contractual obligations. 4.2 Debt Service Payments and Debt Service Ratio 4.2.1 The debt service payments comprise principal repayments and interest payments on the outstanding debt. When debt service payments are large relative to the current receipts, the BoP would be under strain and the economy less resilient to external shocks. A higher debt service ratio may also have adverse impact on the country's sovereign credit rating. Recording and monitoring of debt service payments are, therefore important elements of effective external debt management. 4.2.2 Recent trends in India's external debt service ratio are presented in Figure 4.1. The debt service ratio remained below 5 per cent during 2006-07 to 2008-09. However, it increased to 5.5 per cent in 2009-10 because of higher repayments under external commercial borrowings. 12 Figure 4.1: India's Debt Service Ratio (per cent) 10 10.1 8 6 4.7 4.8 4.4 5.5 4 2 0 2005-06 2006-07 2007-08 2008-09 2009-10 4.2.3 During the period 2006-07 to 2008-09, India's total external debt service payments remained in the range of US$ 11.4 billion to US$ 15.5 billion, before increasing to US$ 18.9 billion in 2009-10. Table 4.1 provides component-wise debt service payments during 2005-06 to 2009-10. The details of debt service payments, since 1990-91 to 2009-10 is given at Annex XI. Table 4.1 : India s External Debt Service Payments (US$ million) Sl. Components April-March 2005-06 2006-07 2007-08 2008-09PR 2009-10QE 1 2 3 4 5 6 7 1 External Assistance 2,652 2,942 3,241 3,381 3,330 Repayments 1,945 1,960 2,099 2,372 2,497 Interest 707 982 1,142 1,009 833

17 1 2 3 4 5 6 7 2 External Commercial Borrowings 14,839 6,331 9,771 10,485 13,893 Repayments 11,824 3,814 6,119 6,521 10,647 Interest 3,015 2,517 3,652 3,964 3,246 3 NRI Deposits 1,497 1,969 1,813 1,547 1,599 Interest 1,497 1,969 1,813 1,547 1,599 4 Rupee Debt Service 572 162 122 101 97 Repayments 572 162 122 101 97 5 Total Debt Service (1 to 4) 19,560 11,404 14,947 15,514 18,919 Repayments 14,341 5,936 8,340 8,994 13,241 Interest 5,219 5,468 6,607 6,520 5,678 Memo items: Current Receipts 1 194,170 242,811 314,284 351,890 342,878 Debt Service Ratio (%) 10.1 2 4.7 4.8 4.4 5.5 Interest payments /current receipts (%) 2.7 2.3 2.1 1.9 1.7 PR: Partially Revised; QE: Quick Estimates. 1: Total Current Account Receipts minus officials transfers 2: Works out to 6.3 per cent, when India Millennium Deposits (IMDs) repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million are excluded. 4.2.4 Figure 4.2 provides the breakup of debt service payments (principal repayments and interest payments) during 2005-06 to 2009-10. During 2009-10, principal repayments at US$ 13.2 billion reflected an increase of 47.2 per cent on account of higher ECBs repayments. The principal repayments accounted for 70.0 per cent of total debt service payments, while the rest was interest payments. Figure 4.2: India's External Debt Service Payments (US$ billion) 16.0 14.0 14.3 13.2 12.0 10.0 8.3 9.0 Per cent 8.0 6.0 5.2 5.9 5.5 6.6 6.5 5.7 4.0 2.0 0.0 2005-06 2006-07 2007-08 2008-09 2009-10 Principal Repayments Interest Payments

18 4.2.5 Component-wise, the debt service on external commercial borrowings continues to dominate, with its share increasing from 67.6 per cent of total debt service in 2008-09 to 71.5 per cent in 2009-10. Other components viz., debt service payments under external assistance (19.2 per cent), NRI deposits (8.8 per cent) and rupee debt service (0.5 per cent) contributed the rest (Figure 4.3). 4.2.6 India's external debt service payments by creditor category are presented in Table 4.2 and Annex XII. Table 4.2: India's External Debt Service Payments Based on Creditor Category (US$ million) Sl. No. Creditor April-March Category 2005-06 2006-07 2007-08 2008-09PR 2009-10QE 1 2 3 4 5 6 7 1 Multilateral : 1,549 1,866 2,096 2,014 2,001 Principal 1,060 1,149 1,255 1,365 1,515 Interest 489 717 841 649 486 2 Bilateral : 1,491 1,400 1,615 1,807 1,832 Principal 1,193 986 1,098 1,268 1,314 Interest 298 414 517 539 518 3 Export Credit : 1,343 1,033 1,971 1,639 1,846 Principal 1,114 645 1,345 1,157 1,392 Interest 229 388 626 482 454 4 Commercial Creditors: 13,108 4,974 7,330 8,406 11,544 Principal 10,402 2,994 4,520 5,103 8,923 Interest 2,706 1,980 2,810 3,303 2,621

19 1 2 3 4 5 6 7 5 NRI Deposits : 1,497 1,969 1,813 1,547 1,599 Interest 1 1,497 1,969 1,813 1,547 1,599 6 Rupee Debt : 572 162 122 101 97 Principal 572 162 122 101 97 7 Total Debt Service: 19,560 11,404 14,947 15,514 18,919 Principal 14,341 5,936 8,340 8,994 13,241 Interest 5,219 5,468 6,607 6,520 5,678 PR: Partially Revised; QE: Quick Estimates. 1: Interest payments on NRI Deposits include both long and short term components. Interest payments on 'Commercial borrowings' include interest payments on short-term debt. Notes: (i) Interest payments on different debt components are calculated on cash payment basis except Non- Resident Indian Deposits for which accrual method is used. Principal repayment under NRI deposits is not included in debt service payments, as these deposits are largely rolled over and are also locally withdrawn on maturity for rupee expenditure. Rupee debt service payments are treated as principal repayments as it is difficult to segregate the interest component. (ii) There may not be one to one correspondence between some categories in Tables 4.1 and 4.2 because of different classifications. 4.2.7 The principal repayments under short-term debt are not included in total debt service payments, which is in line with the best international practice 1. Net disbursement (gross disbursements minus principal repayments) on short-term debt, however, is a useful indicator of external shocks. The experience of recent global crisis shows that gross disbursements of short-term credit to India declined in 2008-09 while repayment increased significantly, resulting in net outflows in 2008-09. With the revival of global financial markets and economic growth, short-term trade credit experienced net inflows in 2009-10 (Table 4.3). Table 4.3: Disbursements and Principal Repayments under Short-term Debt (US$ million) Period Disbursements Principal Repayment Net (April-March) (2-3) 1 2 3 4 2005-06 21,505 17,806 3,699 2006-07 29,992 23,380 6,612 2007-08 47,658 31,729 15,929 2008-09PR 41,841 43,750-1,909 2009-10QE 53,565 45,913 7,652 PR: Partially Revised; QE: Quick Estimates Source: Reserve Bank of India, Balance of Payment data 1 External Debt Statistics Guide for Compilers and Users, International Monetary Fund, 2003.

20 4.3 Terms of Borrowings 4.3.1 Implicit interest rate on total external debt is estimated by taking interest payments during the year as a percentage of the outstanding debt at the end of the previous year. During 2009-10, the implicit interest rate on total external debt was 2.5 per cent (2.9 per cent during 2008-09). The implicit interest on NRI deposits stood at 3.9 per cent as against 3.5 per cent in 2008-09. The rate on external assistance declined marginally to 1.5 per cent from 1.8 per cent during 2008-09. The implicit interest rate on ECB also witnessed decline from 5.6 per cent during 2008-09 to 4.2 per cent in 2009-10 (Table 4.4). Table 4.4: Implicit Interest Rate on India's External Debt (per cent) Components April March 2005-06 2006-07 2007-08 2008-09PR 2009-10 QE 1 2 3 4 5 6 Implicit Interest Rate on Total External Debt 3.9 4.0 3.9 2.9 2.5 Of which: 1 External Assistance 1.5 2.1 2.3 1.8 1.5 2 NRI Deposits 4.6 5.4 4.4 3.5 3.9 3 External Commercial Borrowings 9.5 7.8 7.5 5.6 4.2 PR: Partially Revised; QE: Quick Estimates 4.3.2 Average terms of new commitments for India from official and private creditors are presented in Table 4.5. As expected, the average terms are relatively favourable for official creditors vis-à-vis private creditors. Table 4.5: Average terms of new commitments for India Year Official Creditors Private Creditors Interest Maturity Grace period Interest Maturity Grace period (per cent) (Years) (Years) (per cent) (Years) (Years) 1 2 3 4 5 6 7 2000 5.5 24.0 6.6 4.3 5.1 4.8 2005 3.0 25.2 7.0 4.6 3.5 3.5 2006 3.0 28.1 5.1 2.1 3.8 2.7 2007 4.6 21.4 5.3 6.2 9.4 2.8 2008 1.3 26.9 6.1 - - - Source: World Bank, Global Development Finance Report, 2010. 4.4 Projections of Debt Service Payments 4.4.1 Debt service projections based on long-term debt outstanding at the end of March 2010, show that debt service payments will reach the high of US$ 21.3 billion (US$ 18.2 billion principal repayment and US$ 3.1 billion interest) in 2012-13 (Table 4.6 and Figure 4.4). The large debt service payments during 2011-12 to 2012-13 are primarily on account of higher repayments of ECBs during this period. The repayment of NRI deposits and FII investment in debt securities are not included in the projections.

21 Table 4.6 : Projected Debt Service Payments (US$ million) Year Principal Interest Total (2+3) 1 2 3 4 2010-11 14,350 2,825 17,175 2011-12 15,592 3,302 18,894 2012-13 18,182 3,121 21,303 2013-14 14,253 2,206 16,459 2014-15 16,311 1,983 18,294 2015-16 11,682 1,604 13,286 2016-17 13,071 603 13,674 2017-18 10,310 452 10,762 2018-19 9,760 354 10,114 2019-20 5,775 766 6,541 Note: Debt Service payment projections include external assistance, ECB and FCCB. 25.0 Figure 4.4: Projected Debt Service Payments during 2010-11 to 2019-20 20.0 3.1 US$ billion 15.0 10.0 5.0 2.8 14.4 3.3 15.6 18.2 2.2 14.3 2.0 16.3 1.6 11.7 0.6 13.1 0.5 0.4 10.3 9.8 0.8 5.8 0.0 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 Principal Interest 4.5 Summary 4.5.1 India's external debt service payments continue to remain within manageable limits. During the period 2006-07 to 2008-09, they were in the range of 4.4 per cent to 4.8 per cent before increasing to 5.5 per cent in 2009-10 due to higher repayments under external commercial borrowings (ECBs). Debt service on ECBs, with the share of 71.5 per cent, dominated the total debt service payments in 2009-10, followed by external assistance, NRI deposits and rupee debt.

22 CHAPTER 5 INTERNATIONAL COMPARISON 5.1 Introduction 5.1.1 A cross-country comparison of external debt provides an understanding of a country's external indebtedness in international perspective. The annual publication of the World Bank titled 'Global Development Finance' provides comparable external debt positions for developing countries in terms of debt numbers and key indicators. A comparative picture of India's external indebtedness vis-à-vis top twenty developing debtor countries, in terms of select indicators, based on Global Development Finance Report, 2010, is presented in Annex XIII. 5.2 External Debt of Developing Countries 5.2.1 External debt stock of 128 developing countries stood at US$ 3,718.5 billion at end-december 2008, up by 7.8 per cent over its previous year's level of US$ 3,450.8 billion (Table 5.1). The debt stock had increased sharply by 22.8 per cent in 2007. Of the total external debt of developing countries in 2008, longterm debt accounted for 76.6 per cent, while the rest was short-term debt (22.7 per cent) and the IMF credit (0.7 per cent). Table 5.1: External Debt of Developing Countries: Key Indicators (US$ billion) 2004 2005 2006 2007 2008 1 2 3 4 5 6 External debt stock 2,606.2 2,622.5 2,810.6 3,450.8 3,718.5 Of which: 1. Long-term external debt 2,056.9 2,054.5 2,179.3 2,577.9 2,848.4 2. Use of IMF credit 96.0 49.2 19.9 15.5 25.7 3. Short-term external debt 453.3 518.8 611.5 857.3 844.4 Memo Items: External debt stocks to exports (%) 90.2 73.7 64.6 65.3 58.7 External debt stocks to GNI (%) 32.1 27.1 24.7 24.6 22.1 Debt service to exports (%) 14.0 13.2 12.4 10.2 9.5 Short-term to external debt stock (%) 17.4 19.8 21.8 24.8 22.7 Reserves to external debt stock (%) 61.8 76.4 94.2 108.6 108.2 Reserves to imports (months) 7.0 7.2 7.9 9.1 8.0 Source: Global Development Finance, 2010. 5.2.2 In terms of debt sustainability indicators, there was an improvement in the ratio of external debt to Gross National Income (GNI) and debt service ratio. The ratio of short-term to total external debt improved to 22.7 per cent in 2008 as against 24.8 per cent in 2007. 5.2.3 Long-term external debt of developing countries increased by 81.3 per cent between 1990 and 2000 and by 58.2 per cent during 2000-2008. Borrower-wise details of long-term external debt shows a shift towards private sector borrowers, which accounted for about 52 per cent of the total long term external debt in 2008 (Table 5.2).

23 Table 5.2 : Share of Public and Private Sector in Long-term External Debt of Developing Countries (Per cent) Year Public sector Private sector 1 2 3 2000 71.4 28.6 2004 69.7 30.3 2005 63.6 36.4 2006 56.9 43.1 2007 51.8 48.2 2008 48.4 51.6 Source: World Bank, Global Development Finance Report, 2010. 5.2.4 The analysis of external debt of 128 developing countries reveals that out of the total external debt stock of US$ 3718.5 billion in 2008, twenty developing countries accounted for US$ 2999.0 billion (80.7 per cent). Among the top twenty debtor countries, the external debt stock of Argentina and Thailand declined between 2000 and 2008. A sharp rise was noticed in the external debt stock of Romania (840.3 per cent), Latvia (767.3), Kazakhstan (765.4 per cent), Ukraine (658.6 per cent), Poland (236.3 per cent) and Russian Federation (151.5 per cent). China recorded an increase of 159.6 per cent in its external debt stock, while India's external debt increased by 130.1 per cent during the period 2000-2008 (Figure 5.1). Figure 5.1 : International Comparison of Change in External Debt Stock between 2000 and 2008 (per cent) 800.0 840.3 767.3 765.4 658.6 600.0 400.0 200.0 0.0 236.3 159.6 151.5 137.5 130.1 72.5 58.1 50.5 38.2 35.2 18.6 11.2 5.8 5.2 200.0 Romania Latvia Kazakhastan -9.0 Ukraine -18.7 Poland China Russian Federation Turkey India Chile Malaysia Pakistan Colombia Mexico Venezuela Phillippines Brazil Indonesia Argentina Thailand 5.3 India's External Debt 5.3.1 India was the fifth most indebted country in 2008 in terms of absolute debt stock amongst the top twenty debtor countries of the developing world, after Russian Federation, China, Turkey, and Brazil. The ratio of India's external debt stock to Gross National Income (GNI) at 19.0 per cent was however the fourth lowest with China having the lowest ratio 8.7 per cent in 2008 (Table 5.3).

24 Table 5.3 International Comparison of Top Twenty Developing Debtor Countries, 2008 Sl. No. Countries Total external Short-term Ratio of total Debt Ratio of foreign debt stock debt debt to Gross Service exchange (US$ (US$ National Ratio reserves/ million) million) Income (per cent) total debt (per cent) (per cent) 1 2 3 4 5 6 7 1 Russian Federation 402,453 54,655 25.8 11.5 106.1 2 China 378,245 187,188 8.7 2.0 514.5* 3 Turkey 277,277 50,714 35.3 29.5 26.6 4 Brazil 255,614 36,652 16.2 22.7 75.8 5 India 230,611 45,246 19.0 8.7 111.6 6 Poland 218,022 64,904 42.1 25.0 28.5 7 Mexico 203,984 24,427 19.1 12.1 46.7 8 Indonesia 150,851 26,565 30.4 13.4 34.2 9 Argentina 128,285 37,523 39.9 10.7 36.2 10 Kazakhstan 107,595 10,637 95.0 41.8 18.5 11 Romania 104,943 31,116 54.7 25.3 37.9 12 Ukraine 92,479 20,397 51.7 19.4 34.1 13 Malaysia 66,182 22,800 35.1-139.3 14 Philippines 64,856 7,001 35.0 15.5 57.8 15 Thailand 64,798 24,210 32.0 7.7 171.3 16 Chile 64,277 14,910 41.3 18.2 35.9 17 Venezuela 50,229 16,994 16.0 5.6 85.7 18 Pakistan 49,337 1,395 28.7 8.7 18.3 19 Colombia 46,887 5,684 20.2 16.2 50.5 20 Latvia 42,108 14,091 127.3 37.7 12.5 *: Foreign exchange reserves data are sourced from State Administration of Foreign Exchange, Government of China. Note: Countries are arranged based on the magnitude of debt presented in column no.3 in the Table. Source: World Bank, Global Development Finance, 2010. 5.3.2. In terms of the cover provided by foreign exchange reserves to external debt, India's position was the fourth highest at 111.6 per cent after China, Thailand and Malaysia. Among the top twenty developing debtor countries, 24.4 per cent of their total external debt was short term and the ratio of short-term to total external debt in the range of 3 per cent to 50 per cent (Figure 5.2). However, in five countries, viz., China, Thailand, Malaysia, Venezuela, and Latvia, short-term debt accounted for more than one-third of their external debt. India's position was the tenth lowest with Pakistan having the lowest ratio of short-term to total external debt. These estimates may not however be entirely comparable due to differences in coverage etc.

25 60.0 Figure 5.2: International Comparison of Ratio of Short-term to Total External Debt, 2008 (Per cent) 50.0 49.5 40.0 37.4 34.5 33.8 33.5 30.0 20.0 10.0 29.8 29.7 29.2 23.2 22.1 19.6 18.3 17.6 14.3 13.6 12.1 12.0 10.8 9.9 2.8 0.0 China Thailand Malaysia Venezuela Latvia Per cent Poland Romania Argentina Chile Ukraine India Turkey Indonesia Brazil Russian Federation Colombia Mexico Phillippines Kazakhastan Pakistan 5.3.3 The present value (PV) of external debt outstanding is arrived at by discounting the nominal value of all future debt service payments by the prevailing market rates of interest and aggregating such PVs. The interest rates used in the calculations are the Commercial Interest Reference Rates for each relevant currency compiled and published by the Organization for Economic Cooperation and Development (OECD). The PV of India's external debt worked out to US$ 203.0 billion in 2008, with the ratios of PV of external debt to Gross National Income and export of goods and services at 18 per cent and 70 per cent, respectively (Table 5.4). Table 5.4: Present Value based Indicators of Top Twenty Developing Debtor Countries, 2008 Sl. No. Countries Total Debt PV of debt Ratio of PV of Ratio of PV of Stock 2008 2008 (US$ debt to Gross debt to export (US$ million) National of goods and million) Income services (per cent) (per cent) 1 2 3 4 5 6 1 Russian Federation 402,453 376,764 30 81 2 China 378,245 353,151 10 25 3 Turkey 277,277 260,994 40 170 4 Brazil 255,614 245,974 19 121 5 India 230,611 202,963 18 70 6 Poland 218,022 193,709 46 103 7 Mexico 203,984 197,895 20 62 8 Indonesia 150,851 145,682 35 102 9 Argentina 128,285 126,813 48 171 10 Kazakhstan 107,595 97,907 106 164 11 Romania 104,943 89,996 57 149 12 Ukraine 92,479 89,004 63 124 13 Malaysia 66,182 61,632 35 30

26 1 2 3 4 5 6 14 Philippines 64,856 57,964 37 77 15 Thailand 64,798 59,181 31 32 16 Chile 64,277 58,392 41 74 17 Venezuela 50,229 51,009 21 58 18 Pakistan 49,337 35,957 24 120 19 Colombia 46,887 44,358 23 108 20 Latvia 42,108 39,269 147 301 5.3.4 The international comparison of concessional credit in total external debt shows that India's share of concessional credit in total external debt was the fourth highest (20.5 per cent), after Pakistan (60.6 per cent), Indonesia (27.9 per cent) and Philippines (23.1 per cent). The share of concessional debt to total external debt in top 20 debtor developing countries was in the range of 0.2 per cent to 60.6 per cent (Figure 5.3). Figure 5.3: International Comparison - Share of Concessional Debt in Total External Debt, 2008 60.0 60.6 50.0 40.0 30.0 Per cent 20.0 20.5 10.8 23.1 27.9 11.1 10.0 6.5 0.0 Poland Chile 0.2 Latvia 0.3 0.3 Mexico 0.5 Russian Federation 0.5 Venezuela 1.0 Kazakhstan 1.1 Brazil 1.4 Romania 1.5 Argentina 1.6 1.6 2.1 2.7 Ukraine Colombia Turkey Malaysia China Thailand India Philippines Indonesia Pakistan 5.3.5 The Quarterly External Debt Statistics (QEDS) database, jointly developed by the World Bank and the IMF, brings together detailed external debt data of countries that are subscribing to IMF's Special Data Dissemination Standard (SDDS) / General Data Dissemination System (GDDS). As per the latest QEDS data available at end March 2010, India ranked at sixth position after China, Russian Federation, Brazil, Poland, Turkey in top seventeen developing debtor countries. The position of external debt, at the end of the first quarter of the calendar year 2010, in respect of highly indebted developing countries, which are subscribers to this arrangement, as published by the World Bank (http://go.worldbank.org/ GWMYALHYQ0) is given at Annex XIV. 5.4 Summary 5.4.1 International comparison based on World Bank's 'Global Development Finance, 2010' shows India's comfortable external debt position vis-à-vis other developing countries. India's position was fifth in terms of total external debt stock among the top twenty developing debtor countries in 2008. All the key debt indicators, especially debt to GNI ratio, debt service ratio, short-term to total external debt and the cover of external debt provided by foreign exchange reserves were in comfortable zone.

27 6.1 Introduction CHAPTER 6 SOVEREIGN EXTERNAL DEBT 6.1.1 In pursuance of a cautious and prudent external debt management policy, the Government of India has been borrowing only from the multilateral and bilateral sources. Other debt liabilities of the Government include defence debt, investments by Foreign Institutional Investors (FIIs) and other central banks in treasury bills and dated government securities and Rupee debt owed to Russia. The share of sovereign debt in total external debt has declined over the years, mainly because of the increasing role of private sector in the country s economy. This Chapter provides an overview of the magnitude and composition of sovereign debt, explicit contingent liabilities of the Government, sovereign debt service payments and projections up to the year 2019-20. An overview of external assistance to States, on back-to-back basis, has been incorporated to make the analysis more comprehensive. 6.2 Composition of Sovereign External Debt 6.2.1 During end-march 2009 and end-march 2010, sovereign external debt (SED) increased by US$ 11.2 billion (20.0 per cent) from US$ 55.9 billion to US$ 67.1 billion. Table 6.1 presents a break-up of SED into: (i) External Debt on Government Account under External Assistance and (ii) Other Government External Debt. 6.2.2 Debt from multilateral sources has dominated India s SED and remained in the range of 67-70 per cent of external debt on Government account under External Assistance during 2005 to 2010. Amongst the bilateral creditors, the Government owed US$ 12.4 billion to Japan, followed by Germany (US$ 2.5 billion), Russian Federation (US$ 1.7 billion), France (US$ 0.42 billion) and the United States (US$ 0.38 billion) at end-march 2010. Table 6.1: India s Sovereign External Debt (US$ million) At end-march Sl. No. Category 2005 2006 2007 2008 2009PR 2010QE 1 2 3 4 5 6 7 8 I. External Debt on Govt. Account under External Assistance (A+B) 43,686 43,510 46,155 52,541 51,816 55,232 A Multilateral (1 to 5) 29,204 29,997 32,515 36,171 35,724 37,825 Percentage of Multilateral Debt on Govt. Account under External Assistance 66.8 68.9 70.4 68.8 68.9 68.5 1. IDA 23,693 23,418 24,548 26,496 24,758 25,380 2. IBRD 3,771 4,400 5,015 5,662 5,878 6,397 3. ADB 1,410 1,866 2,623 3,650 4,766 5,717 4. IFAD 277 267 280 312 282 288 5. Others 53 46 49 51 40 43 B Bilateral (6 to 11) a 14,482 13,513 13,640 16,370 16,092 17,407 Percentage of Bilateral Debt on Govt. Account under External Assistance 33.2 31.1 29.6 31.2 31.1 31.5

28 (US$ million) At end-march Sl. No. Category 2005 2006 2007 2008 2009PR 2010QE 1 2 3 4 5 6 7 8 6. Japan 9,662 8,944 8,720 10,806 11,110 12,442 7. Germany 2,564 2,285 2,445 2,849 2,451 2,457 8. United States 790 688 589 512 435 380 9. France 642 554 560 612 472 421 10. Russian Federation 817 1,037 1,321 1,585 1,619 1,702 11. Others 7 5 5 6 5 5 II. Total Other Govt. External Debt (C+D) b 4,011 2,749 3,205 5,529 4,058 11,832 C. Other Govt. External Debt (Long term) 2,852 2,609 2,879 4,914 3,119 10,314 D. Other Govt. External Debt (Short-term) 1,159 140 326 615 939 1,518 III. Total Sovereign External Debt (I+II) 47,697 46,259 49,360 58,070 55,874 67,064 PR: Partially Revised; QE: Quick Estimates a: Includes rupee debt (civilian). b: Other government external debt comprises rupee debt, IMF SDR allocation and FII investment in government securities. 6.2.3 Figures 6.1 and 6.2 represent the information contained in column 8 of Table 6.1 on the institution-wise breakup of multilateral debt and country-wise break-up of bilateral debt. Institution-wise (Figure 6.1), the International Development Association (IDA) accounts for the bulk (67.1 per cent) of the multilateral debt, followed by the International Bank for Reconstruction and Development (IBRD, 16.9 per cent), the Asian Development Bank (ADB, 15.1 per cent), the International Fund for Agricultural Development (IFAD, 0.7 per cent) and Others (0.11 per cent) that primarily includes the Organization of Petroleum Exporting Countries (OPEC) (Annex XV and XVI). Figure 6.2 shows that Japan dominates as the single largest bilateral creditor (71.5 per cent), followed by Germany (14.1 per cent) and the Russian Federation (9.8 per cent). Figure 6.1 : Composition of Sovereign Multilateral Debt at end-march 2010 (per cent) ADB(15.1) IFAD(0.7) Others (0.1) IBRD (16.9) IDA (67.1)

29 Figure 6.2: Composition of Sovereign Bilateral Debt as at end-march 2010 (per cent) France (2.4) Russian Federation (9.8) USA (2.2) Germany (14.1) Japan (71.5) 6.3 Currency Composition 6.3.1 In contrast to the currency composition of the total external debt, which is dominated by the US dollar, currency composition of sovereign debt is dominated by the SDR. As at end-march 2010, the SDR share was 41.7 per cent (Table 6.2 and Figure 6.3 and 6.4) followed by the US dollar (26.5 per cent), Japanese yen (18.6 per cent), Indian rupee (8.9 per cent) and the Euro (4.3 per cent) (Annex XVII). Table 6.2: Currency Composition of Sovereign External Debt Sl. Currency at end-march 2006 2007 2008 2009 PR 2010 QE 1 2 3 4 5 6 7 1 SDR 43.0 43.3 40.7 39.5 41.7 2 US Dollar 27.2 27.9 26.6 29.6 26.5 3 Japanese Yen 19.3 17.7 18.6 19.9 18.6 4 Indian Rupee 4.3 4.9 8.0 5.7 8.9 5 Euro 6.1 6.1 6.0 5.2 4.3 6 Pound Sterling 0.1 0.1 0.1 0.1 0.0 Total (1 to 6) 100 100 100 100 100 PR: Partially revised; QE: Quick Estimates. (per cent)

30 Figure 6.3 : Currency Composition of India's Sovereign External Debt as at end-march 2006 (per cent) Indian Rupee (4.3) Euro (6.1) Pound Sterling (0.1) Japanese Yen (19.3) SDR (43.0) US Dollar (27.2) Figure 6.4: Currency Composition of India's Sovereign External Debt at end-march 2010 (per cent) Euro (4.3 ) Japanese Yen (18.6) US Dollar (26.5) Indian Rupee (8.9) SDR (41.7) 6.4 Debt Service 6.4.1 Sovereign external debt service payments that were around US$ 2.8 billion during 2006-07 to 2008-09, stood at US$ 3.4 billion during 2009-10 (Table 6.3). The debt service payments had increased sharply during 2002-03 and 2003-04, following pre-payments of high cost Government loans to the tune of US$ 2.9 billion in 2002-03 and US$ 3.8 billion in 2003-04 (Annex XVIII).