CHAPTER VI NON-RESIDENT INDIAN DEPOSITS AND EXTERNAL ASSISTANCE Foreign investment into India through NRI deposits and external assistance is dealt with in this chapter. This chapter is conveniently divided into two sections. Section A deals with NRI deposits. External assistance is discussed in Sections B. SECTION A Non-Resident Indian (NRI) Deposits Since the 1980s, Non-Resident Indians (NRIs) have placed a large amount of funds as deposit with the Indian banking system. Such inflows have provided India with the valuable source of foreign exchange. NRI deposit gained momentum in the 1980s in conjunction with the increasing number of Indians going to work overseas, particularly in the Gulf countries. In order to draw their savings back to India, the government formulated NRI deposit schemes that made deposits fully repatriable and that offered attractive interest rates. Non-Resident Indian (NRI) deposits play a significant role in the overall banking capital inflows and the capital account surplus. Government is offering several facilities to Non Resident Indians. NRIs are permitted to open bank accounts in India out of funds remitted from abroad, foreign exchange brought in from abroad or out of funds legitimately due to them in India, with authorised dealer. 1 180
Table 6.1. The total inflow of NRI deposits into India is presented in Table 6.1 Non-Resident Indian Deposits (US $ million) Year NRI Deposits % increase/decrease 1990-91 10209 1991-92 10083-1.23 1992-93 11141 10.49 1993-94 12665 13.68 1994-95 12383-2.23 1995-96 11011-11.08 1996-97 11012 0.01 1997-98 11913 8.18 1998-99 11794-1.00 1999-00 13559 14.97 2000-01 16568 22.19 2001-02 17154 3.54 2002-03 23160 35.01 2003-04 31216 34.78 2004-05 32743 4.89 2005-06 36282 10.81 2006-07 41240 13.67 2007-08 43672 5.90 2008-09 41554-4.85 Average 21018.89 Source : Hand Book of Statistics on Indian Economy September 15, 2009. A look at Table 6.1 shows that the Non-Resident Indian (NRI) deposits varied from US $ 10209 million to US $ 41554 million during the reference period. The NRI deposit gradually increased from 1990-181
91 to 2008-09 except during five years over the respective previous years due to adverse domestic and external events. There has been set backs in few years, but the effects have tended to be short lived. The average NRI deposit during our study period is US $ 21018.89 million. The NRI deposits for each year of the first 12 years is found lesser than the average NRI deposits in the last seven years. It is inferred from this Table that the NRI deposits is on the increase over the reference period. Trend in NRI deposit is measured by using the method of least square. The nature and growth of NRI deposits is presented in Figure 6.1. 182
Fig. 6.1 Non-Resident Indian Deposits 183
An attempt is made by the scholar to bring out the trend in NRI deposits through a regression model. The regression fitted for the total NRI deposits works out to be Y = 21018.29 + 1995.67 x The regression co-efficient calculated for the period from 1991 to 2009 for the NRI deposits of India is 1995.67. It denotes that the NRI deposits of India increases at the rate of US $ 1995.67 million per year from 1991 to 2009. As the R-square value calculated is 0.822, the regression equation is reliable to the extent of 82.2 per cent. Thus there has been a positive trend in the NRI deposits between 1991 to 2009. SECTION B External Assistance External assistance is the most vital component of foreign capital inflow into India. External assistance during the process of India s planned economic development acted as a catalytic agent. In India, external assistance has played a significant role in financing its plan outlays, gross capital formation and technology induction. It has also been a major source for financing major infrastructure projects, projects in the social sector and building up of institutional capacity. 184
The inflow of external assistance in India has come through loans, grants, debt service payments and foreign aid. Loans and Grants External assistance is made available by various multilateral and bilateral agencies to India through loans and grants. World Bank extends assistance through its concessional lending window - International Development Agency (IDA) and market based lending through International Bank for Reconstruction and Development (IBRD). The assistance from Asian Development Bank (ADB) is also market based. These form the principal source of multilateral external assistance to India. The significant bilateral sources offering external assistance include Japan, Germany and United Kingdom. in Table 6.2. The total loans and grants authorised and utilised is presented 185
Year Table 6.2 Loans and Grants Authorised and Utilised Authorised % increase/ decrease Utilised (US $ million) % increase/ decrease 1990-91 4527 3737(82.55) 1991-92 5130 13.32 4689(91.40) 25.47 1992-93 4606-10.21 3589(77.92) -23.46 1993-94 4490-2.52 3769(83.94) 5.02 1994-95 4302-4.19 3478(80.85) -7.72 1995-96 3649-15.18 3307(90.63) -4.92 1996-97 4826 32.26 3372(69.87) 1.97 1997-98 4573-5.24 3166(69.23) -6.11 1998-99 2029-55.63 3149(155.20) -0.54 1999-00 4696 131.44 3329(70.89) 5.72 2000-01 3975-15.35 3127(78.67) -6.07 2001-02 5150 29.56 3603(69.96) 15.22 2002-03 4369-15.17 3312(75.81) -8.08 2003-04 3794-13.16 3883(102.35) 17.24 2004-05 4624 21.88 3805(82.29) -2.01 2005-06 2898-37.33 4257(146.89) 11.88 2006-07 7358 153.90 4237(57.58) -0.47 2007-08 8215 11.46 4946(60.21) 16.76 2008-09 6327-44.60 5331(84.26) 5.94 Average 4712.52 3794(80.51) Source : Hand Book of Statistics on Indian Economy September 15, 2009. (Figures in parenthesis indicate percentage to total) 186
From Table 6.2 it is inferred that there are wide fluctuations in the loans and grants authorised over the period under consideration. The total loans and grants authorised varies from US $ 4527 million to US $ 6327 million during the post liberalisation period. It is interesting to note that the difference between the highest and lowest amount was found to be US $ 6186 million. The total loans and grants utilised varies from US $ 3737 million to US $ 5331 million over the reference period. Highest percentage increase (153.90 per cent) in the total loans and grants authorised was found in the year 2006-07, because special concession was provided by the World Bank and International Development Agency (IDA) in this year and in the consecutive year (2007-08). There was a drastic jump from US $ 2,898 million in the year 2005-06 to US $ 7,358 million in 2006-07. This increase continued in the next year (2007-08) with the highest amount of US $ 8,215 million. However, there was a reduction in the loans and grants authorised in 2008-09 due to the relaxation in the demand for loans and grants in India. Highest percentage increase (25.47 per cent) in the utilisation of loans and grants was found in the year 1991-92 and least percentage increase (1.97 per cent) was found in the year 1996-97. The average loans and grants authorised worked out to be US $ 4712.52 million for the reference period of 19 years. The average 187
utilisation of loans and grants worked out to be US $ 3794 million for the reference period. Utilisation of loans and grants of 12 years is found lesser than the average and for the year 1991-92 and the last six years of the reference period it is found to be higher. It is inferred that, wide fluctuations are found in loans and grants authorised and utilised over the reference period. The nature and growth of loans and grants authorised and utilised is presented in Figure 6.2. 188
Fig. 6.2 Loans and Grants Authorised and Utilized 189
To obtain ordinary least square, the dependent variable y was regressed with the independent variable x. The regression equation for the total loans and grants authorized in India could be written as Y = 3945 + 67.26 x The regression co-efficient calculated for the period from 1990-91 to 2008-09 for the total loans and grants authorised is 67.26. It denotes that the total loans and grants of India increased at the rate of US $ 67.26 million per year from 1990-91 to 2008-09. There has been a positive trend in the total loans and grants authorised during the period between 1990-91 to 2008-09. The regression equation for the total utilisation of loans and grants of India is Y = 3305 + 48.55 x It shows that the loans and grants utilised in India increased at the rate of US $ 48.55 million per year from 1990-91 to 2008-09. As the R-square value calculated is 0.193, the regression equation is reliable to the extent of 19.3 per cent. Thus there has been a positive trend in the utilisation of loans and grants in the study period. 190
Estimating the Correlation between Loans and Grants Authorised and Utilised The co-efficient of correlation (r) between loans and grants authorised and utilised works out to be 0.635. Using Student s t test, the significance of r is tested. On testing the t at (n-2) degrees of freedom (19-2=17), r is significant at 1 per cent level of statistical probability. Debt Service Payments The debt service payment to India is made by the foreign countries in two ways. The two ways are Amortisation Interest payment Debt Service Payment by Amortisation Amortisation refers to the provision to pay a debt over a period of time or the gradual repayment of borrowings in a series of installments. In lending, amortisation is the distribution of a loan repayment into multiple cash flow installments, as determined by an amortisation schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortisation is chiefly used in loan repayments (a common example being a mortgage loan) and in sinking funds. Payments are divided 191
into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortisation schedule, while more money is applied to principal at the end. Debt service by Interest Payment Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed capital or, money earned by deposited funds. When money is borrowed, interest is paid to the lender as a percentage of the principal, the amount owed. The percentage of the principal that is paid as a fee over a certain period of time (typically one month or year), is called the interest rate. Table 6.3. The total debt service payment to India is exhibited in 192
Table 6.3 Debt Service Payment (US $ million) Year Amortisation Interest Total 1990-91 1304(54.38) 1094(45.62) 2398(100) 1991-92 1474(54.84) 1214(45.16) 2688(100) 1992-93 1540(54.73) 1274(45.27) 2814(100) 1993-94 1712(56.04) 1343(43.96) 3055(100) 1994-95 1841(55.54) 1474(44.46) 3315(100) 1995-96 2213(59.83) 1486(40.17) 3699(100) 1996-97 1966(59.22) 1354(40.78) 3320(100) 1997-98 1908(61.15) 1212(38.85) 3120(100) 1998-99 2091(63.10) 1223(36.90) 3314(100) 1999-00 2221(63.88) 1256(36.12) 3477(100) 2000-01 2500(68.23) 1164(31.77) 3664(100) 2001-02 2194(67.07) 1077(32.93) 3271(100) 2002-03 6091(84.32) 1133(15.68) 7224(100) 2003-04 6249(87.92) 859(12.08) 7108(100) 2004-05 2128(74.59) 725(25.41) 2853(100) 2005-06 1887(69.58) 825(30.42) 2712(100) 2006-07 1970(66.85) 977(33.15) 2947(100) 2007-08 2139(65.00) 1152(35.00) 3291(100) 2008-09 2192(69.62) 959(30.38) 3152(100) Average 2400.84(67.67) 1147.2(32.33) 3548.05(100) Source : Hand Book of Statistics on Indian Economy, September 15, 2009. (Figures in parenthesis indicates percentage to total) 193
It is inferred from Table 6.3 that the total debt service payment varies from US $ 2398 million to US $ 3152 million from 1990-91 to 2008-09. Of the two components, the first important component (amortisation) contributes more to the total debt service payment in all the years under consideration. The contribution of second component (interest) is found to be lesser. The percentage share of amortisation to the total debt service payment is more than 50 per cent in all the years. It is inferred that at the aggregate level on an average, the percentage share of amortisation is more than two times higher than the percentage share of interest in the total debt service payment. The nature and growth of total debt service payment is presented in Figure 6.3 194
Fig. 6.3 Total Debt Service Payments 8000 7000 6000 5000 4000 3000 2000 1000 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Actuals Linear (Actuals) 195
The regression equation for the total debt service payment of India is fitted and the scholar gets the result Y =2949 + 59.81 x The regression co-efficient calculated for the reference period for the total debt service payment is 59.81. It denotes that the total debt service payment received increases at the rate of US $ 59.81 million per year in the post liberalisation period. The two components of debt service payments received have been separately analysed and the regression is fitted. The nature and growth of debt service payment by amortisation is presented in Figure 6.4. 196
Fig. 6.4 Debt Service Payment by Amortisation 7000 6000 5000 4000 3000 2000 1000 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 Actuals 1998-99 1999-00 Linear (Actuals) 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 197
The regression equation calculated for the debt service payment by amortisation is written as Y = 1554 + 84.68 x The calculated value of regression co-efficient for the reference period for debt service payment by amortisation is 84.68. It denotes that the debt service payment received through amortisation increases at the rate of US $ 84.68 million per year from 1990-91 to 2008-09. The nature and growth of debt service by interest payments is presented in Figure 6.5 198
Fig. 6.5 Debt Service by Interest Payments 199
The regression equation for the debt service payments received through interest payment is Y = 1396-24.87 x The regression co-efficient calculated for the period from 1990-91 to 2008-09 regarding the debt service payment through interest payment is -24.87. It denotes that the debt service payment through interest payment decreases at the rate of US $ 24.87 million per year from 1990-91 to 2008-09. As the R-square value calculated is 0.449, the regression equation is reliable to the extent of 44.9 per cent. Thus there has been a negative trend in the interest received during this period. Foreign Aid Foreign aid is any flow of capital to an underdeveloped country. Foreign aid is different from other private flows which are prompted by commercial considerations of profits and rate of return. Donor countries give aid primarily because it is in their political, strategic and/or economic self-interest to do so. While some development assistance may be motivated by moral and humanitarian reasons to assists the less fortunate for instance, aid for emergency relief programmes in case of earthquakes, floods, famines etc. The net inflow of foreign aid into India is presented in Table 6.4 200
Year Table 6.4 Net Inflow of Foreign Aid Net Inflow of Foreign Aid US $ million % increase/ decrease 1990-91 1339-1991-92 2001 49.44 1992-93 775-61.27 1993-94 714-7.87 1994-95 163-77.17 1995-96 393 141.10 1996-97 52-86.77 1997-98 46-11.54 1998-99 165 258.70 1999-00 148-10.30 2000-01 537 262.84 2001-02 333-37.99 2002-03 3912 1074.77 2003-04 3225-17.56 2004-05 952-70.48 2005-06 1545 62.29 2006-07 1290-16.50 2007-08 1656 28.37 2008-09 2098 26.69 Average 1123.37 Source : Hand Book of Statistics on Indian Economy September 15, 2009. 201
From Table 6.4 it is clear that the, net inflow of foreign aid into India varies from US $ 1339 million to US $ 2098 million during the reference period. The highest percentage increase (1074.77 per cent) in the net inflow of foreign aid was found in the year 2002-03. The average net inflow of foreign aid into India is US $ 1123.37 million for the reference period. The amount of foreign aid for 11 years is lesser than the average on the one hand. On the other, the net inflow of foreign aid is higher than the average value for eight years. It is inferred that, there exists wide variations in the net inflow of foreign aid into India over the reference period. The nature and growth of net inflow of foreign aid to India is presented in Figure 6.6 202
Fig. 6.6 Net Inflow of Foreign Aid 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Actuals Linear (Actuals) 203
The regression equation for the net inflow of foreign aid into India is Y = 413.5 + 70.98 x The regression co-efficient calculated for the period from 1990-91 to 2008-09 for the net inflow of foreign aid into India is 70.98. It denotes that the net inflow of foreign aid into India increases at the rate of US $ 70.98 million per year from 1990-91 to 2008-09. There has been a positive trend in the inflow of foreign aid during the period under consideration. 204
REFERENCE 1. James Gordon, Poonam Gupta, Non-Resident Deposits in India: In Search of Return? Economic and Political Weekly, Vol. XXXIX, September 11, 2004, p.4165. 205