INDIA S EXTERNAL DEBT

INDIA S EXTERNAL DEBT A Status Report 2008-09 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS SEPTEMBER 2009 www.finmin.nic.in

INDIA S EXTERNAL DEBT A Status Report 2008-09 GOVERNMENT OF INDIA MINISTRY OF FINANCE DEPARTMENT OF ECONOMIC AFFAIRS SEPTEMBER 2009 www.finmin.nic.in

ÉÊ ÉkÉ àéæjééò ÉÉ ié xé<ç ÉÊnããÉÉÒ-110001 FINANCE MINISTER INDIA NEW DELHI-110001 FOREWORD I am happy to present the fifteenth issue of 'India's External Debt: A Status Report: 2008-09'. The Report presents a detailed analysis of debt position upto March 31, 2009, including sovereign external debt issues. A separate section on the implications of global crisis for external debt management has been included to make the coverage topical. 2. The practice of bringing out Status Report started in 1993, in the aftermath of the balance of payment crisis, when external debt numbers were a cause for concern. The purpose was to introduce transparency and exhibit Government resolve in managing external debt prudently. The country has since come a long way and all major solvency and liquidity indicators are now within manageable limits. International comparison based on World Bank's 'Global Development Finance, 2009' also shows India's comfortable external debt position vis-à-vis other developing countries. 3. The main planks of external debt management policies have been regular monitoring of long and short-term debt, emphasis on concessional borrowings with lower interest and longer maturities, rationalising External Commercial Borrowings guidelines and regulating their end-use. It is due to the comfortable external debt position that the Government could liberalize External Commercial Borrowings guidelines and raise Non-Resident deposit interest rates to counter the fallout of global financial crisis. New Delhi (PRANAB MUKHERJEE) September 2009 Finance Minister

CONTENTS Page No. Overview 1 Exhibit 1 Key External Debt Indicators 1 1. Impact of Global Financial Crisis on Debt Flows 3 1.1 Financial Crisis and Developing Countries 3 1.2 Financial Crisis and Debt Flows to India 4 1.3 Policy Measures 5 1.4 Prospects 7 2. Stock of External Debt 8 2.1 Introduction 8 2.2 Stock of External Debt 8 2.3 Creditor Classification 9 2.4 Borrower Classification 11 2.5 Instrument Classification 12 2.6 Currency Composition 13 2.7 Concessional Debt 14 2.8 Key External Debt Indicators 14 2.9 India's International Investment Position 15 3. Short-term External Debt 18 3.1 Introduction 18 3.2 Short-term External debt by Original Maturity 18 3.3 Short-term External debt by Residual Maturity 19 3.4 International Comparison 20 4. Debt Service 22 4.1 Introduction 22 4.2 Debt Service Payments and Debt Service Ratio 22 4.3 Terms of Borrowing 25 4.4 Projections of Debt Service Payments 26 5. International Comparison of External Debt 28 5.1 Introduction 28 5.2 External Debt of Developing Countries 28 5.3 India's External Debt 29 6. Analysis: Sovereign External Debt 32 6.1 Introduction 32 6.2 Composition 32 6.3 Assistance in Pipeline 33 6.4 Debt Service 35 6.5 Projections of Debt Service Payments on Government Account 36 6.6 Currency Composition 38 6.7 Contingent Liability 38 6.8 Central Assistance to State Governments for externally-aided projects 41

(ii) 7. Global Crisis and External Debt Management 45 7.1 Global crisis and impact on India 45 7.2 Lessons for External Debt Management 46 Boxes Page No. 1.1 Impact of Financial Crisis on Private Capital Flows: Estimates of various International Institutions 4 1.2 Remittance flows to developing countries 7 6.1 Public Debt Management 35 6.2 Debt Management Office 39 6.3 Sovereign Ratings 42 Figures 2.1 Ratio of India's external debt to GDP 8 2.2 Composition of India's external debt as at end-march 2009 (per cent) 10 2.3 Currency Composition of India's external debt as at end-march 2009 (per cent) 13 2.4 Ratio of Concessional debt to total external debt 14 4.1 India's Debt Service Ratio 23 4.2 Projected Debt Service Payments during 2009-10 to 2018-19 27 6.1 Currency Composition of Sovereign External Debt as at end-march 2009 (per cent) 38 Text Tables 1.1 Net capital inflows to developing countries 3 1.2 Net Capital Flows to India 5 1.3 External Commercial Borrowings 6 2.1 India's External Debt Outstanding 8 2.2 Composition of India's external debt (US $ million) 9 2.3 Composition of India's external debt ( per cent) 10 2.4 Share of official and private creditors in external debt 11 2.5 External debt by Borrower Classification 11 2.6 (A) Instrument-wise Classification of External Debt as at end-march 2009 (US $ million) 12 (B) Instrument-wise Classification of External Debt as at end-march 2009 (per cent) 13 2.7 Currency Composition of External Debt 13 2.8 Share of Concessional Debt 14 2.9 Key External Debt Indicators 15 2.10 India's International Investment Position 16 2.11 Share of External Debt and Non-debt Financial Liabilities 17 3.1 India's Short-term External Debt Outstanding by Original Maturity 18 3.2 Short-term External Debt by Residual Maturity as at end-march 2009 19 3.3 Outflows from NRI Deposits and Local Withdrawals 20 3.4 Gross External Debt Position of Select Countries 20

(iii) Annex Page No. 4.1 India's External Debt Service Payments (Year-wise) 22 4.2 India's External Debt Service Payments (Component-wise) 22 4.3 India's External Debt Service Payments - by creditor category 24 4.4 Disbursements and Principal Repayments under Short-term Debt 25 4.5 Implicit Interest Rate on India's External Debt 25 4.6 Average terms of new commitments for India from 1990 to 2007 26 4.7 Projected Debt Service Payments 26 5.1 External Debt of Developing countries 28 5.2 Long-term external debt of developing countries 29 5.3 International Comparison: Top twenty debtor developing countries, 2007 30 5.4 Present value based indicators of Top twenty debtor developing countries, 2007 31 6.1 Sovereign External Debt 32 6.2 A. Undrawn Balance (Loan) on Government Account from 2006-07 to 2008-09 33 B. Undrawn Balance (Grants) on Government Account from 2006-07 to 2008-09 34 6.3 Foreign Aid (Sovereign) in the pipeline for infrastructure Sector as on March 31, 2009 34 6.4 Sovereign External Debt Service Payments (Actual) 35 6.5 Creditor-wise Projections of External Debt Service Payments on Government Account 36 6.6 Currency Composition of Sovereign External Debt at end March 2009 38 6.7 Central Government Guarantees on External Debt 39 6.8 Disbursement of External Assistance on Back to Back basis to States during 2006-07 to 2008-09 41 6.9 Undrawn Balance of Back to Back Loans and Grants 42 6.10 Sovereign Credit Rating of India from 2000 to 2009 44 6.11 Credit Ratings of Top Ten Debtors amongst Developing Countries, 2009 44 I Definitions, Concepts, Coverage and Classification of External Debt 48 II Policy Developments relating to raising External Debt 51 III Key External Debt Indicators 54 IV India's External Debt Outstanding - Annual (Rs.crore) 55 V India's External Debt Outstanding -Annual (US$ million) 58 VI India's External Debt Outstanding -Quarterly (Rs.crore) 61 VII India's External Debt Outstanding -Quarterly (US$ million) 64 VIII External Debt by Borrower Categories (US$ million) 67 IX International Comparison of Top Twenty Debtor developing Countries, 2007 68 X India's External Debt Service Payments- Source-wise 69 XI India's External Debt Service Payments by Creditor Categories 70 List of Abbreviations 71

1 OVERVIEW 1. Global financial crisis has affected external borrowing in India in three major ways. First, the drying up of global liquidity together with risk aversion and deleveraging has led to sizeable drop in commercial flows. Gross external commercial borrowing (ECB) disbursements at US$ 14.1 billion during 2008-09 were less than half of the previous year s level of US$ 29.0 billion and were part of the general decline in capital inflows, which included sharp reversal of Foreign Institutional Investment (FII) flows. Net capital flows, as a result, declined from 9.1 per cent of GDP in 2007-08 to 0.8 per cent in 2008-09. Multilateral, bilateral flows however improved and non-resident deposit flows increased significantly due to liberalization of interest rates to counter the fallout of crisis. 2. Secondly, decline in the Rupee exchange rate against major currencies meant that external debt liability increased in Rupee terms, with attendant implications for debt service payments. Together with slowdown in exports and difficult domestic environ, this meant greater strain on corporate balance sheets. The decline of Rupee also affected Government finances to the extent it led to higher debt service payments in Rupee terms on external debt liabilities. Thirdly, major slowdown in overseas bank lending and difficult capital market environment means that corporate borrowers may find it difficult to refinance maturing obligations. 3. Despite the crisis, all the major external debt indicators were at comfortable level during the year under review. India s foreign exchange reserves provided a cover of 109.5 per cent to the external debt stock as at end-march 2009 (137.9 per cent at end-march 2008). Debt service ratio further declined to 4.6 per cent in 2008-09 from 4.8 per cent in 2007-08. The ratio of external debt to Gross Domestic Product (GDP) was however higher at 22.0 per cent during 2008-09 as against 19.0 per cent in 2007-08. The ratio of short-term debt to foreign exchange reserves also increased from 15.2 per cent at end-march 2008 to 19.6 per cent at end-march 2009 and the ratio of short-term to total external debt increased marginally from 20.9 per cent to 21.5 per cent during the same period. Exhibit 1: Key External Debt Indicators (Per cent) Year External Total Debt Concessional Foreign Short-term Short-term debt (US$ external service to total exchange debt to to total billion) debt to ratio debt reserves foreign debt GDP to total exchange debt reserves 1990-91 83.8 28.7 35.3 45.9 7.0 146.5 10.2 1995-96 93.7 27.0 26.2 44.7 23.1 23.2 5.4 2000-01 101.3 22.5 16.6 35.4 41.7 8.6 3.6 2001-02 98.8 21.1 13.7 35.9 54.7 5.1 2.8 2002-03 104.9 20.3 16.0* 36.8 72.5 6.1 4.5 2003-04 111.6 17.8 16.1** 36.1 101.2 3.9 4.0 2004-05 133.0 18.5 5.9^ 30.9 106.4 12.5 13.3 2005-06 138.1 17.2 10.1# 28.6 109.8 12.9 14.1 2006-07R 171.3 18.1 4.7 23.1 116.2 14.1 16.4 2007-08PR 224.6 19.0 4.8 19.7 137.9 15.2 20.9 2008-09QE 229.9 22.0 4.6 18.2 109.5 19.6 21.5 R: Revised; PR: Partially Revised; QE: Quick Estimates * Works out to 12.4 % with the exclusion of pre-payment of US$ 3.4 billion. ** works out to 8.2% with the exclusion of pre-payment of US$ 3.8 billion and redemption of Resurgent India Bonds of US$ 5.5 billion. ^ Works out to 5.7 % excluding pre-payment of US$ 381 million. # Works out to 6.3 %, excluding India Millennium Deposit repayments of US $ 7.1 billion and pre-payment of US$ 23.5 million. Note: Suppliers credits up to 180 days and FII investments in short-term debt instruments are included under short-term external debt since end-march 2005. Short-term debt also includes Nostro/Vostro liabilities of the banking sector and balances under non-resident rupee accounts/investment in treasury bills maintained by foreign central banks/international institutions with the Reserve Bank from end-march 2007 onwards.

2 4. India s external debt stock at end-march 2009 stood at US $ 229.9 billion (Rs. 1,169,575 crore), which was higher by US$ 5.3 billion or 2.4 per cent over previous year s level of US$ 224.6 billion. The moderate increase was due to the valuation effect of appreciation of the US dollar vis-à-vis major international currencies and the slowdown in external borrowings. In Rupee terms, however, external debt recorded a rise of 30.2 per cent due to the depreciation of Indian rupee against the US dollar and other major international currencies, except the Japanese yen. 5. The Government (Sovereign) external debt declined to US$ 54.9 billion as at end-march 2009 from US $ 56.9 billion at end-march 2008. Its share in total external debt was lower at 23.9 per cent as at end-march 2009 (25.4 per cent at end-march 2008). Government guaranteed external debt was marginally higher at US$ 6.8 billion at end-march 2009 (US$ 6.6 billion at end-march 2008). Government and Government guaranteed debt was US $ 61.7 billion at end-march 2009, accounting for 26.8 per cent of total external debt. 6. A cross-country comparison of external debt of twenty most indebted developing countries, based on World Bank publication Global Development Finance, 2009 indicates that India was the fifth most indebted developing country in 2007 in terms of stock of external debt. In terms of ratio of external debt to Gross National Income, India s position was the sixth lowest, with China having the lowest ratio of external debt to GNI at 11.6 per cent. The element of concessionality in India s external debt portfolio was the third highest after that of Indonesia and the Philippines.

3 CHAPTER 1 IMPACT OF GLOBAL FINANCIAL CRISIS ON DEBT FLOWS 1.1 Financial Crisis and Developing Countries 1.1.1 Global financial crisis and economic downturn have exposed vulnerability of developing countries to changes in external economic environment. During the period of favourable external environment characterized by high growth and ample global liquidity, they reaped the benefits in terms of higher levels of exports and capital inflows. They have however been badly affected during the recent phase of global financial crisis, which reflects the impact of their greater integration with the global economy and increasing dependence on capital flows to meet their external financing requirements. It is estimated that almost onequarter of total domestic capital formation in developing countries in the years preceding the crisis was financed through foreign capital. IMF analysis in its World Economic Outlook, April 2009 suggests that financial crisis combined with a globally synchronized downturn results in unusually severe and long lasting recession, as has happened during the present crisis. 1.1.2 Between 2003 and 2007, net private capital flows (both equity and debt) to developing countries increased sharply and reached a peak of US$ 1.2 trillion in 2007 (8.6 per cent of developing country GDP). Net debt flows increased from US$ 77.6 billion in 2003 to US$ 205.6 billion in 2006 and further to US$ 499.1 billion in 2007. However, in 2008 total net international flows of private capital amounted to US$ 707 billion (4.4 per cent of GDP), with debt flows recording a steep decline to US$ 128.3 billion. Developing countries could raise only US$ 10.5 billion through issue of bonds in 2008, while bank lending declined by 57.3 per cent to US$ 123.0 billion. Net short-term debt flows turned negative at US$ 16.3 billion in 2008 as against inflow of US$ 202.5 billion in 2007. The situation is similar to the Asian crisis, when short-term debt flows had fallen more sharply than the decline in other flows to developing countries. Table 1.1: Net capital inflows to developing countries (US$ billion) 2001 2003 2005 2006 2007 2008E Current account balance 15.5 118.4 306.6 438.2 406.1 377.9 Net private and official inflows 224.2 258.6 498.7 668.3 1,157.7 727.3 Net private inflows Of which: 197.3 269.1 569.7 739.2 1,157.5 706.9 Net equity inflows 172.3 181.0 347.2 462.7 658.6 599.0 Net debt flows Of which: 51.9 77.6 151.5 205.6 499.1 128.3 Official creditors 26.9-10.5-71.0-70.9 0.2 20.4 Private Creditors 25.0 88.1 222.5 276.5 498.9 107.9 Net M-L term debt flows 2.1 26.6 135.9 166.4 296.4 124.2 Bonds 10.2 20.4 56.2 26.6 85.4 10.5 Banks -1.9 10.4 84.2 144.6 214.5 123.0 Other Private -6.2-4.2-4.5-4.8-3.5-9.3 Net short-term debt flows 22.9 61.5 86.6 110.1 202.5-16.3 E: Estimate Source: Global Development Finance, 2009

4 1.1.3 Global Development Finance, 2009 estimates indicate a continuation of the declining phase in 2009 with net private debt and equity flows projected to fall to 2 per cent of GDP in 2009 (8.6 per cent of GDP in 2007), before they rise marginally to 2.6 per cent in 2010. The recent decline in net private capital flows to developing countries is the sharpest as against a decline of 3.3 percentage points during the Latin American debt crisis in the early 1980s and 2.4 percentage points during the combined East Asian and Russian crises of the late 1990s. External financing needs of developing countries (98 countries) are estimated at US$ 1 trillion (7.8 per cent of GDP) in 2009 and the resource gap (i.e., the gap between external financing needs and private debt and equity flows) is placed in the range of US$ 350-635 billion. Institute for International Finance (March 2009) Box 1.1: Impact of Financial Crisis on Private Capital Flows: Estimates of various International Institutions World Bank Background paper prepared by the World Bank Staff for G-20 meeting (March 2009) Decline in net private capital flows to emerging markets to US$ 467 billion in 2008, i.e., half of their 2007 level. A further decline to US$ 165 billion is forecast for 2009, with over three-quarters of the decline due to deterioration in net flows from commercial banks. 98 of the 104 developing countries are expected to face external financing gap amounting to US$ 268 billion, which could rise to US$ 700 billion in case rollover difficulties are faced. Global Development Finance (July 2009) IMF World Economic Outlook, April 2009 IMF Staff Projections (April 2009) IMF-World Economic Outlook Update and Global Financial Stability Report (July 2009) Net private capital flows to developing countries fell to US$ 707 billion in 2008 from a peak of US$ 1.2 trillion in 2007 and are projected to fall further to US$ 363 billion in 2009.Private debt flows to developing countries are projected to fall in 2009 to (-) 0.3 per cent of GDP, with much of the movement in short-term debt. Medium and long-term debt is expected to be limited in 2009. Net private capital flows to emerging and developing economies declined to US$ 109.3 billion in 2008 from US$ 617.5 billion in 2007 and are estimated at ( )US$ 190.3 billion in 2009. Net official flows are, however, estimated at US$ 57.6 billion in 2009 as against ( ) US$ 60.0 billion in 2008. Net private capital flows to emerging market (and developing) countries are projected to decline from an inflow of US$ 600 billion in 2007 to an outflow of US$ 180 billion in 2009. The return of risk appetite, resumption of portfolio inflows, decline in global sovereign spreads, etc. indicate that emerging market sentiment has strengthened. However, the overall outlook for emerging markets remains vulnerable to lower than expected global growth and to constrained international bank lending. 1.2 Financial Crisis and Debt Flows to India 1.2.1 The global developments have impacted Indian economy through financial and real channels during the year under review. The effect on real sector through declining exports has continued since October 2008, while the severity of the financial flows could be gauged from the deceleration in net capital flows, which declined from US$ 108.0 billion during 2007-08 to US$ 9.1 billion during 2008-09. The

5 decline was seen in both debt and non-debt capital flows during the year. Net ECB inflows at US$ 8.2 billion in 2008-09 were around 65.0 per cent lower than previous year s level of US$ 22.6 billion, reflecting tight liquidity conditions and higher financing costs in the overseas markets. The net short-term trade credits flows were negative at US$ 5.8 billion during 2008-09 as against an inflow of US$ 17.2 billion during 2007-08. Similarly, banking capital excluding NRI deposits recorded an outflow of US$ 7.7 billion in 2008-09 (Table 1.2). Table 1.2: Net Capital Flows to India (US$ million) Item 2006-07 2007-08(PR) 2008-09(P) 1 2 3 4 Total Capital Flows 45,203 107,993 9,146 Of which: Debt Flows External Assistance 1,775 2,114 2,638 External Commercial Borrowings 16,103 22,633 8,158 NRI Deposits 4,321 179 4,290 Banking Capital excluding NRI deposits -2,408 11,578-7,687 Short-term Trade Credits 6,612 17,183-5,795 Rupee Debt Service -162-121 -101 P: Preliminary PR: Partially Revised Source: Reserve Bank of India 1.3 Policy Measures 1.3.1 Against the above backdrop, it would be important to draw attention to the policy measures taken by the Government and the Reserve Bank to counter the negative impact of financial crisis on capital flows, while ensuring that adequate domestic and foreign exchange liquidity was made available to meet the financing requirements of corporates and other sectors of the economy. Important policy measures introduced during 2008-09 related to external commercial borrowings, short-term trade credits and nonresident Indian (NRI) deposits. 1.3.2 The Ministry of Finance regularly reviews and revises the policy stance on ECBs and trade credits in consultation with the Reserve Bank of India, keeping in view the financing requirements of the corporate sector and prevailing liquidity conditions in the domestic and international financial markets (Annex-II). The policy developments relating to external commercial borrowings during 2008-09 indicated a move towards liberalisation in terms of expanding the list of eligible borrowers, easing all-in-cost ceilings, relaxations in end-use stipulations, etc. Keeping in view the higher financing costs on account of tightness in the global credit markets, the all-in-cost ceilings applicable to ECBs were raised in May 2008, September 2008, October 2008 and the requirement of all-in-cost ceiling was dispensed with under the Approval route till June 30, 2009, with the stipulation that eligible borrowers proposing to avail of ECB beyond the permissible all-in-cost ceilings should approach the Reserve Bank under the Approval route. The relaxation has been extended further up to December 31, 2009. 1.3.3 Notwithstanding the relaxations in policy guidelines in the wake of unfavorable global developments, ECB disbursements more than halved in 2008-09 from their level in 2007-08 as liquidity in the international capital markets tightened and cost of funds increased sharply, particularly in the second half of the year, following the global financial crisis. This was in sharp contrast to the situation in 2007-08, when gross disbursements under ECBs reached a level of US$ 29.0 billion backed by buoyant international capital market conditions, ample global liquidity and greater risk appetite of global investors for emerging market bonds.

6 Table 1.3: External Commercial Borrowings* (US$ million) Year Approvals Gross Amortisation Interest Total Debt Disbursements Debt Outstanding** Service** 1 2 3 4 5 6 7 2000-01 2,837 9,295 5,043 1,683 6,726 30,922 2001-02 2,653 2,933 4,013 1,534 5,547 29,579 2002-03 4,235 3,033 5,001 1,180 6,181 28,074 2003-04 6,671 5,149 8,015 2,031 10,046 25,809 2004-05 11,490 9,094 3,571 959 4,530 31,595 2005-06 17,175 14,606 11,518 2,996 14,514 32,371 2006-07 R 24,492 20,727 3,785 1,709 5,495 48,488 2007-08 PR 29,231 29,002 6,063 2,630 8,694 71,077 2008-09 QE 17,286 14,125 6,426 2,702 9,128 78,240 *: Commercial borrowings include loans from commercial banks, other financial institutions, money raised through issue of securitised instruments like Bonds e.g., India Development Bonds (IDBs) and Resurgent India Bonds (RIBs), Floating Rate Notes (FRN), ECP, etc. It also includes borrowings through Buyers credit & Suppliers credit mechanism, official export credit agencies of the concerned countries, IFC(W), Nordic Investment Bank and private sector borrowings from ADB. Note: Disbursements during 2000-01 include amount raised through India Millennium Deposits (US$5.5 billion). Debt service payments during 2003-04 and 2005-06 include redemption of RIBs {US$5.2 billion (principal US$ 4.2 billion and interest US$1 billion)} and IMDs {US$7.1 billion (principal US$5.2 billion and interest US$1.6 billion)}, respectively. **: May show variation as compared to other figures given elsewhere in this Report due to differences in classification. R: Revised; PR: Partially Revised; QE: Quick Estimates. 1.3.4 Similarly, the all-in-cost ceiling for trade credit for a maturity period up to three years was enhanced to 200 basis points over 6 month LIBOR during 2008-09, taking into account higher cost of funds in international capital markets due to financial crisis. 1.3.5 The interest rate ceiling on Foreign Currency Non-Resident (Banks) (FCNR(B)) and Nonresident External Rupee Account (NR(E)RA) deposits were revised upward in September 2008 and October 2008 to counter the effect of global crisis on balance of payments through making these deposits more attractive. The interest rate ceiling was further revised and set at LIBOR/SWAP rates plus 100 basis points for FCNR (B) and LIBOR/SWAP rates plus 175 basis points for NR(E)RA deposits w. e. f. November 16, 2008. NRI deposit flows have responded positively to the revisions in interest rate ceiling on these deposits during the year. Limit on overseas borrowings by banks was enhanced in October 2008 from 25 per cent to 50 per cent of their unimpaired Tier I capital at the close of the previous quarter or US$ 10 million, whichever is higher. The limit for investment by FIIs in Government securities/treasury bills was raised from US$ 3.2 billion to US$ 5 billion on June 6, 2008. The limit for FII investment in corporate debt was raised to US$ 3.0 billion on June 6, 2008 and further to US$ 6.0 billion and US$ 15 billion with effect from October 16, 2008 and January 2, 2009, respectively. 1.3.6 Reflecting the impact of global financial crisis on debt flows to India, the external debt growth contracted substantially to 2.4 per cent in 2008-09 from 31.1 per cent in 2007-08. However, in rupee terms, India s external debt stock recorded a rise of 30.2 per cent in 2008-09, mainly due to depreciation in the value of Indian rupee vis-à-vis US dollar and other major international currencies. Excluding the valuation effect, the increase in external debt would have been higher at US$ 18.7 billion in 2008-09.

7 1.3.7 During 2008-09, the depreciation in the value of Indian rupee in terms of annual average exchange rate against the US dollar at 12.5 per cent meant higher debt service obligations in Rupee terms in a crisis environment. 1.4 Prospects 1.4.1 Emerging market economies have lately been on a recovery path with turnaround in equity markets and resumption of capital market activity, following improvement in risk appetite and revival of investor interest in cross-border investments. Corporate bonds are again in demand and there is fresh appetite for high yield bonds and sovereign emerging economy issuances due to the perceived need for diversification and low global interest rate environment. However, notwithstanding the signs of improvement, the IMF, July 2009 forecast indicates that external financing conditions are expected to remain constrained for a considerable time as the deleveraging process continues to restrict bank lending and financial restructuring including recapitalisation of banks in advanced countries will take time in the wake of large public funding requirements for the purpose. 1.4.2 IMF has also revised its growth projections for emerging Asia, reflecting improved growth prospects in China and India attributed to substantial macroeconomic stimulus and a faster than expected turnaround in capital flows. Indian economy attracted FII investment, with a total inflow reaching US$ 10.3 billion during April-August. ECB approvals during April-May 2009 remained subdued at US$ 0.8 billion but picked up during June 2009 (US$ 1.9 billion) and July 2009 (US$ 2.0 billion). Total ECB approvals during April-July 2009, however, were lower at US$ 4.7 billion (US$ 6.2 billion during April- July 2008). NRI deposits (net) recorded an inflow of US$ 2.4 billion during April-July 2009 as against US$ 0.7 billion during the corresponding period of 2008-09. Bank lending to developing countries including India may take some time to revive till the structural and supervisory issues are adequately addressed and recapitalization process is complete. The positive developments in the international capital markets point to a reversal of the downward trend in capital flows, which had set in around mid-september 2008, though downside risks still prevail. Box 1.2: Remittance flows to developing countries Remittance flows to developing countries at US$ 328 billion in 2008 were higher by 15 per cent over US$ 285 billion in 2007, though there were signs of slowdown since the last quarter of 2008 (World Bank, July 2009). Region-wise estimates show that remittance flows remained strong in South Asia in 2008, i.e., up by 33.0 per cent while remittances to East Asia and the Pacific increased by 20 per cent. Latin America and the Caribbean region however recorded an increase of only 2 per cent in 2008 and fell significantly in the first half of 2009, following continued weakness in the US job market. World Bank estimates indicate that remittance flows to developing countries will fall by 7-10 per cent in 2009 as global GDP is expected to contract by 2.9 per cent in 2009. The decline is expected to be in the range of 4 per cent (South Asia) to 15 per cent (Europe and Central Asia). Notwithstanding the expected decline in remittance flows during 2009, these are still considered to be more resilient vis-à-vis private flows to developing countries, which are expected to contract by 50 per cent or more in 2009. However, the countries with large remittance inflows relative to GDP are expected to face difficulties in case flows are affected adversely due to economic downturn in source countries or unfavorable exchange rate movements (e.g. Russia as source country). In India, private transfer receipts, comprising mainly remittances from Indians working overseas were higher at US$ 46.4 billion (4.0 per cent of GDP) in 2008-09 as against US$ 43.5 billion (3.7 per cent of GDP) in 2007-08. Source: Migration and Development Brief, Development Prospects Group, World Bank and Reserve Bank of India.

8 2.1 Introduction CHAPTER 2 STOCK OF EXTERNAL DEBT 2.1.1 External debt of a country indicates contractual liability of residents to non-residents. The stock of external debt and its composition viz., currency composition, interest structure, borrower/creditor classification are important inputs for debt sustainability and policy formulation. 2.2 Stock of External Debt 2.2.1 India s external debt, which had increased by 31.1 per cent in 2007-08, was marginally higher (2.4 per cent) at US$ 229.9 billion at end-march 2009 (Table 2.1). The valuation effect, reflecting the appreciation of the US dollar against major international currencies, together with slowdown in disbursements due to global crisis, moderated the increase. Excluding the valuation effect, the stock of external debt as at end-march 2009 would have increased by US$ 18.7 billion over the level at end-march 2008. In terms of rupees, the increase in India s external debt was 30.2 per cent, attributable primarily to depreciation of Indian rupee against the US dollar and other major international currencies. Table 2.1: India s External Debt Outstanding At end-march Total External Debt 2001 2005 2006 2007R 2008PR 2009QE US $ million 101,326 132,973 138,133 171,331 224,573 229,887 Rs. crore 472,625 581,802 616,144 746,918 897,955 1,169,575 External Debt to GDP Ratio (%) 22.5 18.5 17.2 18.1 19.0 22.0 R: Revised; PR: Partially Revised; QE: Quick Estimates 30 Figure 2.1: Ratio of India's External Debt to GDP ( per cent) 25 20 Per cent 15 28.7 27.0 10 22.5 21.1 20.3 17.8 18.5 17.2 18.1 19.0 22.0 5 0 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Year

9 2.2.2 During 2008-09, most components of external debt, except export credit and bilateral credits, showed nominal change. Commercial borrowings, which had recorded an increase of US$ 20.9 billion in 2007-08, posted a marginal rise of US$ 0.3 billion. This reflected the impact of tight liquidity conditions in international financial markets, following the global financial crisis. Component-wise details of external debt outstanding since end-march 2007 along with annual variations are presented in Table 2.2. Table 2.2 : Composition of India s External Debt (US$ million) Sl. Components At end -March Variation (absolute) No. 2009 2008 2007 March 2009 March 2008 QE PR R to March 2008 to March 2009 (3-4) (4-5) 1 2 3 4 5 6 7 1 Multilateral 39,566 39,490 35,337 76 4,153 (0.2) (11.8) 2 Bilateral 20,587 19,702 16,065 885 3,637 (4.5) (22.6) 3 Export credits 14,604 10,358 7,165 4,246 3,193 (41.0) (44.6) 4 Commercial Borrowings 62,676 62,337 41,443 339 20,894 (0.5) (50.4) 5 NRI Deposits (long-term) 41,554 43,672 41,240-2,118 2,432 (-4.8) (5.9) 6 Rupee Debt 1,527 2,016 1,951-489 65 (-24.3) (3.3) 7 Total Long term debt (1 to 6) 180,514 177,574 143,201 2,940 34,373 (1.7) (24.0) 8 Short-term debt 49,373 46,999 28,130 2,374 18,869 (5.1) (67.1) 9 Total External debt (7+8) 229,887 224,573 171,331 5,314 53,242 (2.4) (31.1) R: Revised; PR: Partially Revised; QE: Quick Estimates Figures within parentheses indicate percentage variation 2.3 Creditor Classification 2.3.1 Between 2001 and 2009, the share of multilateral and bilateral creditors in total external debt declined by around 20 percentage points to 26.2 per cent of total external debt at end-march 2009. Deposits from non-resident Indians, which had increased as a percentage of total external debt from 16.4 per cent in 2000-01 to 26.3 per cent in 2005-06, accounted for 18.1 per cent of total external debt at the end of March 2009. Between March 2005 and March 2009, commercial borrowings increased by 137.4 per cent, with a corresponding increase in its share in total external debt from 19.9 per cent to 27.3 per cent. Short-term debt was the second largest component with a share of 21.5 per cent in total external debt at end-march 2009 (Table 2.3). 2.3.2 At end-march 2009, commercial borrowings accounted for the highest share in total external debt at 27.3 per cent, followed by short-term debt (21.5 per cent), NRI deposits (18.1 per cent), multilateral debt (17.2 per cent), bilateral debt (8.9 per cent), export credits (6.3 per cent) and rupee debt (0.7 per cent). Figure 2.2 depicts the component-wise share of total external debt at end-march 2009.

10 Table 2.3: Composition of India s External Debt As at the end of March (Per cent) Sl. No. Category 2001 2005 2006 2007R 2008 PR 2009 QE 1 Multilateral 30.7 23.9 23.6 20.6 17.6 17.2 2 Bilateral 15.8 12.8 11.4 9.4 8.8 8.9 3 Export Credits 5.9 3.7 3.9 4.2 4.6 6.3 4 Commercial Borrowings 24.1 19.9 19.2 24.2 27.8 27.3 5 NRI Deposits 16.4 24.6 26.3 24.1 19.4 18.1 6 Rupee Debt 3.7 1.7 1.5 1.1 0.9 0.7 7 Total Long Term Debt (1 to 6) 96.4 86.7 85.9 83.6 79.1 78.5 8 Short-term debt 3.6 13.3 14.2 16.4 20.9 21.5 9 Grand Total (7+8) 100 100 100 100 100 100 R: Revised; PR: Partially Revised; QE: Quick Estimates Figure 2.2: Composition of India's External Debt as at end-march 2009 (per cent) Short-term Debt 21.5 Rupee Debt 0.7 Multilateral 17.2 NRI Deposits 18.1 Bilateral 8.9 Commercial Borrowings 27.3 Export Credit 6.3 2.3.3 Over the years, the share of official creditors in total external debt has declined; the decline was 23.8 percentage points between March 2001 and March 2009.

11 Table 2.4: Share of Official and Private Creditors in External debt End-March Official Creditors Private Creditors 2001 51.2 48.8 2002 51.8 48.2 2003 48.3 51.7 2004 45.2 54.8 2005 39.3 60.7 2006 37.3 62.7 2007R 31.8 68.2 2008PR 27.8 72.2 2009 QE 27.4 72.6 (Per cent) R: Revised; PR: Partially Revised; QE: Quick Estimates. Note: 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.private creditors denote sources of loans raised under ECBs, NRI deposits, export credits other than those included under official creditors and short-term debt. 2.4 Borrower Classification 2.4.1 The borrower-wise classification of external debt provides breakdown into Government (Sovereign) and non-government debt (Table 2.5). The latter can be further divided into financial, public and private sectors. Non-Government debt has continued to increase in terms of its share in total external debt. As at end-march 2009, the non-government debt was more than three-fourths of total external debt at 76.1 per cent as against 74.6 per cent as at end-march 2008. Details of Borrower-wise classification of external debt are provided in Annex VII. Table 2.5: External Debt by Borrower Classification At end-march (US$ million) Sl.No. Component 2001 2005 2006 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 I. Government 43,956 46,668 45,278 48,331 56,947 54,856 Debt (43.4) (35.1) (32.8) (28.2) (25.4) (23.9) II. Non-Government 57,370 86,305 92,855 123,000 167,626 175,031 Debt (A+B) (56.6) (64.9) (67.2) (71.8) (74.6) (76.1) A. Long-term (1+2+3) 53,742 69,741 73,456 95,196 121,242 126,597 1 Financial Sector* 32,661 43,455 42,334 48,414 50,971 48,682 2 Public Sector** 9,024 6,496 6,671 7,978 11,040 12,375 3 Private Sector*** 12,057 19,790 24,451 38,803 59,232 65,540 B. Short-term 3,628 16,564 19,399 27,804 46,384 48,434 III. Total External Debt (I+II) 101,326 132,973 138,133 171,331 224,573 229,887 R: Revised; PR: Partially Revised; QE: Quick Estimates. *: Financial sector includes borrowings by banks and financial institutions and NRI Deposits. **: Public sector debt represents borrowings of non- financial public sector enterprises. ***: Private sector debt represents borrowings of non- financial private sector enterprises. Figures in parentheses indicate percentage share in total external debt.

2.5 Instrument Classification 12 2.5.1 The instrument-wise classification of external debt viz., bonds and notes, loans, trade credits and deposits along with borrower-wise details is presented in Tables 2.6A and 2.6B. The share of loans, which includes multilateral, bilateral and bank loans, was 51.8 per cent of total external debt as at end- March 2009, followed by trade credits (20.9 per cent), deposits (18.4 per cent), bonds and notes (7.8 per cent) and money market instruments (1.1 per cent). Table 2.6A: Instrument-wise Classification of External Debt as at end-march 2009 Instruments (US$ million) Sl. Borrower Creditor Bonds & Loans Trade Deposits Total No. Notes Credits I Government 963 51,680 1,274 0 53,917 1 Multilateral 0 35,724 0 0 35,724 2 Bilateral 0 14,656 0 0 14,656 3 Export Credit 0 0 1,274 0 1,274 4 Commercial 963 0 0 0 963 5 Rupee Debt 0 1,300 0 0 1,300 II Financial Sector 2,494 5,709 0 41,554 49,757 1 Multilateral 0 752 0 0 752 2 Bilateral 0 1,304 0 0 1,304 3 Export Credit 0 130 0 0 130 4 Commercial 2,494 3,523 0 0 6,017 5 NRI Deposits 0 0 0 41,554 41,554 III Non-Financial Public Sector 520 11,852 3 0 12,375 1 Multilateral 0 2,785 0 0 2,785 2 Bilateral 0 3,108 0 0 3,108 3 Export Credit 0 2,173 3 0 2,176 4 Commercial 520 3,559 0 0 4,079 5 Rupee Dept 0 227 0 0 227 IV Non-Financial Private Sector 14,004 49,748 713 0 64,465 1 Multilateral 0 304 0 0 304 2 Bilateral 0 1,520 0 0 1,520 3 Export Credit 0 10,311 713 0 11,024 4 Commercial 14,004 37,613 0 0 51,617 V Short-Term Debt 2,634 0 45,975 764 49,373 1 Trade Credits 0 0 45,975 0 45,975 2 Commercial 2,634 0 0 764 3,398 VI. Total External Debt 20,615 118,989 47,965 42,318 229,887 1 Multilateral 0 39,565 0 0 39,565 2 Bilateral 0 20,588 0 0 20,587 3 Export Credit 0 12,614 1,990 0 14,604 4 Commercial 17,981 44,695 0 0 62,676 5 NRI Deposits 0 0 0 41,554 41,554 6 Rupee Debt 0 1,527 0 0 1,527 7 Short-term debt 2,634 0 45,975 764 49,373 * : Commercial external borrowings by the Central Government represent FII investment in Government securities. ** : Financial sector includes financial development institutions, commercial banks and non-banking financial companies.

13 Table 2.6B: Instrument-wise Classification of External Debt as at end-march 2009 (per cent) Sl. Borrower Bonds & Loans Trade Deposits Total No. Notes Credits I Government 0.4 22.5 0.6 0.0 23.5 II Financial Sector 1.1 2.5 0.0 18.1 21.7 III Non-Financial Public Sector 0.2 5.2 0.0 0.0 5.4 IV Non-Financial Private Sector 6.1 21.6 0.3 0.0 28.0 V Short-Term Debt 1.1 0.0 20.0 0.3 21.5 VI Total 8.9* 51.8 20.9 18.4 100.00 * Includes Money market instruments. 2.6 Currency Composition 2.6.1 The currency composition of India s external debt reveals that the US dollar denominated debt remained predominant, with its share in total external debt rising further during the period 2004-05 to 2008-09. The share of US dollar denominated debt in total external debt was the largest at 56.5 per cent as at end-march 2009, followed by Japanese yen (13.4 per cent), Indian rupee (15.1 per cent) and SDRs (9.2 per cent). Table 2.7: Currency Composition of External Debt (per cent) Sl. No. Currency At end-march 2001 2005 2006 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 1 US Dollar 55.0 48.0 49.2 51.4 54.4 56.5 2 SDRs 12.8 14.2 13.7 11.9 10.1 9.2 3 Indian Rupees 12.4 19.6 18.9 18.6 17.5 15.1 4 Japanese Yen 10.1 10.5 10.9 11.5 12.0 13.5 5 Euro 5.8 4.6 4.4 3.9 3.5 3.6 6 Pound Sterling 2.9 2.6 2.6 2.4 2.2 1.9 7 Others 1.0 0.5 0.3 0.3 0.3 0.2 Total (1 to 7) 100.0 100.0 100.0 100.0 100.0 100.0 R: Revised; PR: Partially Revised; QE: Quick Estimates. Figure 2.3: Currency Composition of India's External Debt as at end-march 2009 (per cent) Indian Rupees 15.1 Japanese Yen 13.5 SDR 9.2 Other 5.7 Euro 3.6 Pound Sterling 1.9 Others 0.20 US Dollar 56.5

14 2.7 Concessional Debt 2.7.1 Concessionality in external loans indicates the softer terms and conditions of loans in relation to the prevailing market conditions. Concessionality could be reflected in lower rate of interest, longer repayment/grace period, lesser/non-charging of commitment charges, etc. Concessionality is measured by the difference between the face value of a credit and the sum of the discounted future debt service payments to be made by the borrower. 2.7.2 Different multilateral institutions follow different norms for classifying credits into concessional and non-concessional. In India, loans from International Development Association, International Fund for Agricultural Development, Rupee debt, etc. are termed as concessional. The proportion of concessional loans to total external debt has declined steadily from 36.1 per cent during 2003-04 to 18.2 per cent during 2008-09. Table 2.8 : Share of Concessional Debt Sl. No. Component As at end-march (US$ billion) 2001 2004 2005 2006 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 9 1 Total external debt 101.3 111.6 133.0 138.1 171.3 224.6 229.9 2 Concessional debt 35.9 40.3 41.1 39.6 39.6 44.2 41.9 3 Non-concessional debt 65.4 71.4 91.9 98.5 131.7 180.4 188.0 4 Share of Concessional debt in total debt (per cent) 35.4 36.1 30.9 28.6 23.1 19.7 18.2 Note: A creditor classification approach is used for classifying debt as concessional. R: Revised; PR: Partially Revised; QE: Quick Estimates. Figure 2.4: Ratio of concessional to total external debt 50 45 45.9 44.7 Per cent 40 35 30 25 35.4 35.9 36.8 36.1 30.9 28.6 23.1 20 19.7 18.2 15 10 5 0 Period (at end-march) 1990-91 1995-96 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2.8 Key External Debt Indicators 2.8.1 The sustainability of external debt is assessed on the basis of several solvency and liquidity parameters such as the ratio of external debt to Gross Domestic Product, the ratio of foreign exchange reserves to total external debt, debt service ratio, the share of concessional debt in total external debt, etc. In the context of the impact of repayment obligations on liquidity and foreign exchange reserves position,

15 it is also important to regularly monitor the ratio of short-term debt (by original maturity) and short-term debt by residual maturity to total external debt; the latter being an important indicator of the market and roll-over (refinancing) risks associated with the repayment of external debt. During 2008-09, the external debt indicators remained in the comfortable zone (Table 2.8 & Annex III). India s foreign exchange reserves provided a cover of 109.5 per cent to the external debt stock at the end of March 2009 as against 137.9 per cent at end-march 2008. The ratio of short-term debt to foreign exchange reserves was higher at 19.6 per cent at end-march 2009 (15.2 per cent at end-march 2008). The share of short-term debt in total debt also increased to 21.5 per cent during 2008-09 from 20.9 per cent during 2007-08. Reflecting the increasing dependence on non-concessional private debt in total external debt, the share of concessional debt in total external debt fell to 18.2 per cent in 2008-09. India s debt service ratio was also marginally lower at 4.6 per cent during 2008-09. Table 2.9 : Key External Debt Indicators (Per cent) Year External Total Debt Concessional Foreign Short-term Short-term debt (US$ external service to total debt exchange debt to debt to billion) debt to ratio reserves foreign total debt GDP to total exchange debt reserves 1 2 3 4 5 6 7 8 1990-91 83.8 28.7 35.3 45.9 7.0 146.5 10.2 1995-96 93.7 27.0 26.2 44.7 23.1 23.2 5.4 2000-01 101.3 22.5 16.6 35.4 41.7 8.6 3.6 2001-02 98.8 21.1 13.7 35.9 54.7 5.1 2.8 2002-03 104.9 20.3 16.0* 36.8 72.5 6.1 4.5 2003-04 111.6 17.8 16.1** 36.1 101.2 3.9 4.0 2004-05 133.0 18.5 5.9^ 30.9 106.4 12.5 13.3 2005-06 138.1 17.2 10.1# 28.6 109.8 12.9 14.1 2006-07 R 171.3 18.1 4.7 23.1 116.2 14.1 16.4 2007-08 PR 224.6 19.0 4.8 19.7 137.9 15.2 20.9 2008-09 QE 229.9 22.0 4.6 18.2 109.5 19.6 21.5 PR: Partially Revised QE: Quick Estimates R: Revised. * Works out to 12.4 % with the exclusion of pre-payment of US$ 3.4 billion. ** works out to 8.2% with the exclusion of pre-payment of US$ 3.8 billion and redemption of Resurgent India Bonds of US$ 5.5 billion. ^ Works out to 5.7 % excluding pre-payment of US$ 381 million. # Works out to 6.3 %, excluding India Millennium Deposit repayments of US$ 7.1 billion and pre-payment of US$ 23.5 million. Note: Suppliers credits up to 180 days and FII investments in short-term debt instruments are included under short-term external debt since end-march 2005. Short-term debt also includes Nostro/Vostro liabilities of the banking sector and balances under non-resident rupee accounts/investment in treasury bills maintained by foreign central banks/international institutions with the Reserve Bank from end-march 2007 onwards. 2.9 India s International Investment Position 2.9.1 The International Investment Position (IIP) is the stock of external financial assets and liabilities of a country on a specific reference date, usually at the end of the quarter or a year. The change in the position between two end-periods reflects financial transactions, valuation changes, and other adjustments

16 which occurred during the period. The net international investment position (the stock of external financial assets less the stock of external financial liabilities) shows the difference between what an economy owns in relation to what it owes. Table 2.10: India s International Investment Position Sl. No. Assets/Liabilities At end-march (US$ billion) 2003 2004 2005 2006 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 9 A Assets 95.6 136 165.7 184.0 247.3 385.6 350.0 1 Direct Investment Abroad 5.8 7.8 10.0 15.9 30.9 49.8 67.3 2 Portfolio Investment 0.8 0.4 0.5 1.0 0.9 1.5 0.8 3 Financial Derivatives 0 0 0 0 0 0 0.8 4 Other Investment 12.9 14.9 13.7 15.5 16.2 24.5 29.9 5 Reserve Assets 76.1 113 141.5 151.6 199.2 309.7 252.0 B Liabilities 156.1 183.2 219.6 243.7 308.7 438.4 415.3 C 1 Direct Investment in Reporting Economy 31.2 38.2 44.5 52.4 77.0 118.3 124.8 2 Portfolio Investment 32.4 43.7 56.0 64.3 79.4 120.1 84.9 3 Other Investment 92.4 101.3 119.2 127.1 152.2 200.0 205.6 a) Trade Credits 4.9 6.3 18.3 21.2 27.7 45.2 48.0 b) Loans 61.1 61.9 66.0 68.0 80.8 106.9 114.0 c) Currency and Deposits 25.6 32.2 33.6 37.3 41.7 44.8 42.3 d) Other Liabilities 0.9 1.0 1.2 0.6 2.0 3.1 1.3 Net Assets (+)/Net Liabilities (-) -60.5-47.2-53.9-59.8-61.4-52.8-65.3 R:Revised; PR: Partially Revised; and QE: Quick Estimates Source: Reserve Bank of India 2.9.2 Net financial claims of non-residents on India showed an increase to US$ 65.3 billion at end-march 2009 from US$ 52.8 billion at end-march 2008. Both external assets and liabilities declined during 2008-09 but the decline in external assets was sharper to US$ 350.0 billion, reflecting a decline of US$ 57.7 billion in reserve assets during the same period. Reserve assets accounted for 72 per cent of total external assets at end-march 2009. Total external liabilities stood lower at US$ 415.3 billion at end-march 2009 as against US$ 438.4 billion at end-march 2008. This was attributable to portfolio investment liabilities, which fell sharply to US$ 84.9 billion at end-march 2009, following an outflow of investment by Foreign Institutional Investors during 2008-09. The valuation effect arising as a result of depreciation of the Indian rupee against the US dollar also contributed to the fall in portfolio investment liabilities in dollar terms. 2.9.3 The ratio of net IIP of India to GDP was (-) 6.3 per cent as at end-march 2009 as compared with (-) 4.5 per cent as at end-march 2008. The ratio of total external financial assets to GDP (at current prices) increased to 33.5 per cent at end-march 2009 (32.6 per cent at end-march 2008), while the ratio of total external financial liabilities to GDP was placed at 39.8 per cent at end-march 2009, i.e., higher than its previous year s level of 37.1 per cent.

17 2.9.4 The share of non-debt liabilities to total external financial liabilities moved up to 55.6 per cent at end-march 2009 from 51.5 per cent at end-march 2008 (Table 2.11). Table 2.11: Share of External Debt and Non-Debt Financial Liabilities Sl. No. Item As at end-march (Per cent) 2004 2005 2006 2007 2008 2009 1 Non-Debt Liabilities 39.4 41.8 45.9 44.2 48.5 44.5 2 Debt Liabilities 60.6 58.2 54.1 55.8 51.5 55.6 3 Total 100 100 100 100 100 100 Source: Reserve Bank of India. To sum up, creditor-wise classification of external debt indicates predominance of commercial borrowings, short-term debt and NRI deposits, while the multilateral and bilateral sources have declined in relative importance. In terms of borrower-wise classification, there has been a shift from Government to non-government borrowings over the years as the dependence on external sources of finance for meeting investment requirements has increased in response to strengthening of the growth process in the economy. Instrument-wise classification shows that loans are the most popular instrument being used by both Government and non-government borrowers. US dollar denominated debt accounted for the largest share in India s external debt during 2008-09.

18 3.1 Introduction CHAPTER 3 SHORT-TERM EXTERNAL DEBT 3.1.1 Short-term external debt is an important indicator of debt sustainability in volatile financial markets. The financial crisis in the emerging economies in the second half of 1990s underlined the importance of using short-term external by residual maturity as a vulnerability indicator as the availability of shortterm finance is affected the most during times of crisis and can pose risk to external and financial stability of a country. The recent global financial crisis establishes that short-term debt flows exhibit higher volatility than medium and long-term flows, particularly during crises. A financial stress index compiled by the IMF for 18 emerging economies indicates that financial stress was observed in all segments of financial systems in all emerging regions during the fourth quarter of 2008 and it exceeded levels seen during the Asian crisis. Reflecting these developments, short-term debt flows to developing countries turned negative in the third quarter of 2008 and this trend continued in the fourth quarter of 2008. Against this backdrop, this Chapter reviews developments in India s short-term external debt by original and residual maturity and also provides a comparative picture of India s short-term external debt position vis-à-vis select developing countries as at end-march 2009. 3.2 Short-term External debt by Original Maturity 3.2.1 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 expansion in the coverage of short-term debt to include (i) suppliers credit maturing in less than six months and (ii) FII investment in treasury bills and other short-term debt instruments having a maturity of one year or less from the quarter beginning March 2005. Beginning March 2007, the coverage was further expanded to include investment in treasury bills by foreign central banks/international institutions and short-term external debt liabilities of Central Bank and commercial banks. The ratio of short-term debt to total debt, as a result, increased from 4.0 per cent in 2003-04 to 13.3 per cent in 2004-05 and further to 21.5 per cent in 2008-09. Trade-related credits accounted for around 93.0 per cent of total short-term external debt outstanding at end-march 2009. Trade credits outstanding, which had increased by 66.1 per cent in 2007-08, grew by only 6.5 per cent to US$ 45.9 billion in 2008-09. At this level, it accounted for 15.6 per cent of total imports in 2008-09 (16.7 per cent in 2007-08). Table 3.1: India s Short-term External Debt Outstanding by Original Maturity (US$ million) Sl. No. Category At end-march 2001 2004 2005 2006R 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 9 1 Short-term Debt (a to e) 3,628 4,431 17,723 19,539 28,130 46,999 49,373 a) NRI Deposits 957 304 - - - - - b) Trade Credits 2,671 4,127 16,271 19,399 25,979 43,162 45,975 Above 6 months and up to 1 year 2,671 4,127 7,529 8,696 11,971 22,884 23,346 Up to 6 months - - 8,742 10,703 14,008 20,278 22,629 c) FII investment in Govt. Treasury Bills and other instruments - - 1,452 140 397 651 2,065 d) Investment in Treasury Bills by foreign Central Banks and international Institutions, etc. - - - - 164 155 105

19 Sl. No. Category At end-march 2001 2004 2005 2006R 2007R 2008PR 2009QE 1 2 3 4 5 6 7 8 9 e) External debt liabilities of : - - - - 1,590 3,031 1,228 1) Central Bank - - - - 501 1,115 764 2) Commercial Banks - - - - 1,089 1,916 464 2 Long-term debt 97,698 107,214 115,250 118,594 143,201 177,574 180,514 3 Total External Debt (1+2) 101,326 111,645 132,973 138,133 171,331 224,573 229,887 4 Imports (during the year) 57,912 80,003 118,908 157,056 190,670 257,789 294,587 5 Ratio of Trade Credits to Imports (%) 4.6 5.2 13.7 12.4 13.6 16.7 15.6 6 Ratio of Short-term debt to total debt (%) 3.6 4.0 13.3 14.1 16.4 20.9 21.5 R: Revised; PR: Partially Revised; QE: Quick Estimates Short-term deposits of less than one-year maturity under NR(E)RA were withdrawn effective April 2003. Data on short-term trade credits of less than six months in respect of supplier s credit are available beginning March 2005. Imports data are on balance of payments basis. 3.3 Short-term External Debt by Residual Maturity 3.3.1 Short-term debt by residual maturity which comprises principal repayments due during a one-year reference period under medium and long-term loans, and short-term debt with original maturity of one year or less, stood at US$ 93.3 billion as at the end of March 2009. At this level, it accounted for 40.6 per cent of total external debt and 37.0 per cent of total foreign exchange reserves at end-march 2009. Table 3.2: Short-term External Debt by Residual Maturity as at end-march 2009 (US$ million) Sl. No. Components Short-term Long-term Total Up to one Year 1 to 2 2 to 3 More (April 09 to years years than 3 March 2010) years 1 2 3 4 5 6 7 1 Sovereign Debt (Long-term) 2,603 2,924 3,015 45,375 53,917 2 Commercial Borrowings (including Export Credits) 9,189 10,839 14,521 50,494 85,043 3 NRI Deposits (i+ii+iii) 32,108 4,465 3,757 1,224 41,554 i. FCNR(B) 9,944 2,085 1,075 107 13,211 ii. NR(E)RA 18,649 2,015 2,041 865 23,570 iii. NRO 3,516 365 641 252 4,773 4 Short-term Debt (Original Maturity)* 49,373 0 0 0 49,373 Total 93,273 18,228 21,293 97,093 229,887 Short-term debt (Residual Maturity) as per cent of total Debt 40.6 Short-term debt (Residual Maturity) as per cent of Foreign Exchange 37.0 Reserves Foreign Exchange Reserves as at end-march 2009 (US$ million) 251,735.0 Note: Residual Maturity of NRI Deposits is estimated on the basis of the Survey conducted by the Reserve Bank on NRI deposits outstanding as on March 31, 2009. 2. FII investment in government dated securities is included under Sovereign debt (long-term), while FII investment in treasury bills is included under short-term debt. FII investment in corporate paper and other debt instruments is included under Commercial Borrowings and short-term debt depending on the tenor of the instrument. * Includes short-term component of sovereign debt amounting to US $ 939 million.

20 3.3.2 NRI deposits by residual maturity (up to one year) at US$ 32.1 billion account for 34.4 per cent of total short-term debt by residual maturity at the end of March 2009. It is in ex-ante sense and it has been observed that NRI rupee deposits held in NR (E)RA and NRO deposit schemes are generally locally withdrawn, which is evident from the data set out in the following table: Table 3.3: Outflows from NRI Deposits and Local Withdrawals (US$ million) Year Outflows Local Withdrawals 2006-07 15,593 13,208 (84.7) 2007-08 (PR) 29,222 18,919 (64.7) 2008-09 (P) 32,799 20,617 (62.9) PR: Partially Revised P: Preliminary Note: Outflows relate to total NRI deposits. Figures within parentheses indicate share of local withdrawals in total outflows from NRI deposits. Source: Reserve Bank of India. 3.3.3 The local withdrawals of NRI deposits are not actually repatriated and are utilised domestically. In addition, the NRI deposits also get renewed/rolled over. In view of the observed redemption pattern of NRI deposits, the repayment obligations, as measured by residual maturity, do not involve foreign exchange outgo of the same amount. Similarly, about 93 per cent of short-term debt by original maturity relates to short-term trade credits, which represent buyers and suppliers credit for the purpose of financing of imports. This also includes suppliers credit of less than 6 months estimated at US$ 22.6 billion as at end-march 2009. It may be added that the statistics relating to short-term debt by original maturity are not comparable across countries due to differences in coverage and compilation methodologies. 3.4 International Comparison 3.4.1 Short-term debt by original and residual maturity is an important liquidity and vulnerability indicator in volatile financial market conditions. A cross-country comparison of the ratio of short-term debt to total external debt for select developing countries, based on the Quarterly External Debt Statistics (QEDS) database of the World Bank and IMF for end-march 2009 is presented in Table 3.4. Table 3.4: Gross External Debt Position of Select Countries (US$ million) Sl. No. Category End-March 2009 Ratios as per cent Short- Long- Total Foreign Short- Foreign Shortterm debt term debt external exchange term debt exchange term debt debt reserves @ to total reserves to to foreign (3+4) external total debt exchange debt reserves 1 2 3 4 5 6 7 8 9 1 Russian Federation 60,156 390,642 450,798 383,889 13.3 85.2 15.7 2 China# 173,468 163,253 336,721 1,953,741 51.5 580.2 8.9 3 Turkey 48,133 217,212 265,345 70,588 18.1 26.6 68.2 4 Brazil 32,351 227,575 259,926 190,388 12.4 73.2 17.0 5 India 49,373 180,514 229,887 251,735 21.5 109.5 19.6

1 2 3 4 5 6 7 8 9 21 6 Poland 45,558 177,073 222,631 61,251 20.5 27.5 74.4 7 Mexico 23,821 145,437 169,258 85,636 14.1 50.6 27.8 8 Indonesia 17,757 133,275 151,032 54,840 11.8 36.3 32.4 9 Argentina 36,044 91,490 127,534 46,509 28.3 36.5 77.5 10 Kazakhstan 8,579 96,521 105,100 18,891 8.2 18.0 45.4 11 Ukraine 18,777 80,382 99,159 25,393 18.9 25.6 73.9 12 Romania 22,803 72,526 95,329 36,499 23.9 38.3 62.5 13 Malaysia 30,389 43,240 73,629 87,821 41.3 119.3 34.6 14 Chile 12,742 52,134 64,876 23,382 19.6 36.0 54.5 15 Thailand 18,536 42,956 61,492 116,216 30.1 189.0 15.9 16 Philippines 6,500 45,983 52,483 39,041 12.4 74.4 16.6 17 Croatia 5,320 46,894 52,214 11,686 10.2 22.4 45.5 18 Colombia 4,788 42,031 46,819 23,475 10.2 50.1 20.4 Source: Table 1 of Quarterly External Debt Statistics (QEDS), World Bank & IMF. # Based on information disseminated by State Administration of Foreign Exchange, Government of China @ Based on Special Data Dissemination System database of IMF. 3.4.2 China had the highest ratio of short-term to total external debt at 51.5 per cent, followed by Malaysia (41.3 per cent), Thailand (30.1 per cent), Argentina (28.3 per cent) and Romania (23.9 per cent). The ratio of short-term debt to total external debt of India was 21.5 per cent and it was 19.6 per cent of foreign exchange reserves at end-march 2009.

22 CHAPTER 4 DEBT SERVICE 4.1 Introduction 4.1.1 Debt service ratio, as measured by the proportion of total debt service payments i.e., principal plus interest payments to current receipts is a debt sustainability indicator and indicates the claim that servicing of external debt makes on current receipts of Balance of Payments (BOP) of a country. It is therefore a measure of strain on BOP due to servicing of external debt service 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. The debt service is generally seen in the context of capacity to meet these payments, which are contractual obligations to non-residents, from current receipts of BOP. In case debt service payments are large relative to current receipts and /or foreign exchange reserves, it reduces the resilience of the economy to external shocks, as less foreign exchange is available for contingencies. The debt service projections also assume significance for estimating the impact of debt service payments on future liquidity flows and foreign exchange reserves position of the country. Table 4.1 : India s External Debt Service Payments (US$ million) Debt-service April-March Payments 2000-01 2003-04 2004-05 2005-06 2006-07R 2007-08PR 2008-09QE Total 12,821 19,165 9,155 19,560 11,404 14,946 15,430 Repayments 8,359 14,614 6,117 14,341 5,936 8,339 8,912 Interest 4,462 4,551 3,038 5,219 5,468 6,607 6,518 R: Revised; PR: Partially revised; QE: Quick estimates. 4.2.2 External debt service payments reached a level of US$ 19.6 billion in 2005-06, which was due to India Millennium Deposits repayments of US$ 7.1 billion. During 2003-04, total external debt service payments were around US$ 19.2 billion, when there was pre-payment of high cost loans of US$ 3.8 billion and Resurgent India Bonds were redeemed involving payment of US$ 5.5 billion. However, the debt service payments during the last two years have been around US$ 15 billion with the debt service ratio remaining in the range of 4.6-4.8 per cent. 4.2.3 During 2008-09, the debt service payments increased marginally i.e., by 3.2 per cent to US$ 15.4 billion. Of the total debt service payments, external commercial borrowings accounted for US$ 10.4 billion or 67.4 per cent, followed by external assistance (21.9 per cent) and NRI deposits (10.0 per cent). The debt service ratio however was lower at 4.6 per cent in 2008-09 as against 4.8 per cent in 2007-08. Annex X provides time series data relating to debt service payments from 1990-91 to 2008-09. Table 4.2 : India s External Debt Service Payments (US$ million) Sl. No. Components April-March 2000-01 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 R PR QE 1 2 3 4 5 6 7 8 9 1 External Assistance 3,444 6,983 2,855 2,652 2,942 3,241 3,381 Repayments 2,338 6,193 2,129 1,945 1,960 2,099 2,372 Interest 1,106 790 726 707 982 1,142 1,009

23 Sl. No. Components April-March 2000-01 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 R PR QE 1 2 3 4 5 6 7 8 9 2 External Commercial Borrowings 7,073 10,164 4,530 14,839 6,331 9,771 10,401 Repayments 5,378 8,045 3,571 11,824 3,814 6,119 6,439 Interest 1,695 2,119 959 3,015 2,517 3,652 3,962 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 1,642 1,353 1,497 1,969 1,813 1,547 Interest 1,661 1,642 1,353 1,497 1,969 1,813 1,547 5 Rupee Debt Service 617 376 417 572 162 121 101 Repayments 617 376 417 572 162 121 101 Total Debt Service (1 to 5) 12,821 19,165 9,155 19,560 11,404 14,946 15,430 Repayments 8,359 14,614 6,117 14,341 5,936 8,339 8,912 Interest 4,462 4,551 3,038 5,219 5,468 6,607 6,518 Current Receipts# 77,467 119,239 154,123 194,170 242,811 314,014 337,095 Debt Service Ratio (%) 16.6* 16.1** 5.9^ 10.1^^ 4.7 4.8 4.6 Interest payments to current receipts Ratio (%) 5.8 3.8 2.0 2.7 2.3 2.1 1.9 R: Revised PR: Partially Revised; QE: Quick Estimates. #: Current Account Receipts minus officials transfers * Works out to 12.4 %, with the exclusion of pre-payment of US$ 3.4 billion. ** Works out to 8.2 %, with the exclusion of pre-payment of US$ 3.8 billion and redemption of Resurgent India Bonds (RIBs) of US$ 5.5 billion. ^ Works out to 5.7 % with the exclusion of pre-payment 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. Figure 4.1: India's Debt Service Ratio ( per cent) 40 35 35.3 30 25 26.2 20 15 19.5 18.7 16.6 13.7 16.0 16.1 10 10.1 5 5.9 4.9 4.8 4.6 0 1990-91 1995-96 1997-98 1998-99 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 R 2007-08 PR 2008-09 QE

24 4.2.4 India s external debt service payments by creditor category are presented in Table 4.3 & Annex XI. Table 4.3: India s External Debt Service Payments - by creditor category Sl. No. Creditor April-March (US$ million) Category 2000-01 2003-04 2004-05 2005-06 2006-07R 2007-08PR 2008-09QE 1 2 3 4 5 6 7 8 9 I Multilateral 2,411 4,553 1,299 1,549 1,669 2,096 2,014 Principal 1,629 4,093 919 1,060 1,149 1,255 1,365 Interest 782 460 380 489 520 841 649 II Bilateral 1,593 2,923 1,960 1,491 1,317 1,615 1,807 Principal 1,108 2,525 1,524 1,193 1,010 1,098 1,270 Interest 485 398 436 298 307 517 537 III IMF 26 0 0 0 0 0 0 Principal 26 0 0 0 0 0 0 Interest 0 0 0 0 0 0 0 IV Export Credits 1,670 1,090 718 1,343 994 1,971 2,037 Principal 1,302 877 618 1,114 709 1,345 1,056 Interest 368 213 100 229 285 626 981 V Commercial Borrowings 4,843 8,581 3,408 13,108 5,684 7,330 7,924 Principal 3,677 6,743 2,639 10,402 4,297 4,520 5,120 Interest 1,166 1,838 769 2,706 1,387 2,810 2,804 VI NRI Deposits 1,661 1,642 1,353 1,497 1,969 1,813 1,547 Interest* 1,661 1,642 1,353 1,497 1,969 1,813 1,547 VII Rupee Debt 617 376 417 572 162 121 101 Principal 617 376 417 572 162 121 101 VIII Total Debt Service 12,821 19,165 9,155 19,560 11,795 14,946 15,430 Principal 8,359 14,614 6,117 14,341 7,327 8,339 8,912 Interest 4,462 4,551 3,038 5,219 4,468 6,607 6,518 IX Current Receipts 77,467 119,239 154,123 194,170 242,811 314,014 337,095 Debt Service Ratio (VIII/IX) (%) 16.6 16.1 5.9 10.1 4.9 4.8 4.6 Interest to Current Receipts Ratio (%) 5.8 3.8 2.0 2.7 1.8 2.1 1.9 R: Revised PR: Partially Revised; QE: Quick Estimates *: Interest payments on NRI Deposits include both long term and short term components of NRI Deposits.Interest payments on Commercial borrowings also include interest payments on short-term debt. Note: 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 and used for rupee expenditure on maturity. Rupee debt service payments are treated as principal repayments as it is difficult to segregate the interest component separately.

25 4.2.5 The principal repayments under short-term debt are not included in total debt service payments, which is in line with the best international practices and the methodological guidelines available in the External Debt Statistics Guide, 2003. Net disbursement on short-term debt however is a useful indicator of the impact of external shocks to the economy, as can be seen from Table 4.4 below. Table 4.4: Disbursements and Principal Repayments under Short-term Debt (US$ million) Component April March 2000-01 2004-05 2005-06 2006-07 R 2007-08 PR 2008-09 QE 1 2 3 4 5 6 7 Disbursements 11,224 17,394 21,505 29,992 48,911 39,734 Principal Repayments 10,693 13,602 17,806 23,380 31,728 45,529 Net 551 3,792 3,699 6,612 17,183-5,795 R:Revised; PR: Partially Revised; QE: Quick Estimates. 4.3 Terms of Borrowings 4.3.1 Implicit interest rate on total external debt is worked out by taking interest payments made during the year as a percentage of the outstanding debt at the end of the previous year. During 2008-09, the implicit interest rate on total external debt was 2.9 per cent as against 3.9 per cent during 2007-08. The implicit interest rate on NRI deposits was also lower at 3.5 per in 2008-09 (4.4 per cent in 2007-08). This reflects the decline in interest rates in international financial markets, despite upward revision of interest ceiling on NRI deposits during 2008-09. 4.3.2 The implicit interest rate on external assistance declined marginally to 1.8 per cent during 2008-09 from 2.3 per cent during 2007-08. Table 4.5: Implicit Interest Rate on India s External Debt (per cent) Components April March 2000-01 2004-05 2005-06 2006-07 R 2007-08 PR 2008-09 QE 1 2 3 4 5 6 7 Implicit Interest Rate on total External Debt 4.5 2.7 3.9 4.0 3.9 2.9 Of which: 1 External Assistance 2.3 1.6 1.5 2.1 2.3 1.8 2 NRI Deposits 12.3 4.3 4.6 5.4 4.4 3.5 R: Revised; PR: Partially Revised QE: Quick Estimates. 4.3.3 Average terms of new commitments for India from official and private creditors are presented in Table 4.6. As expected, the average terms are relatively favourable in the case of official creditors vis-à-vis private creditors.

26 Table 4.6: Average terms of new commitments for India from 1990 to 2007 Year Official Creditors Private Creditors Interest Maturity Grace period Interest Maturity Grace period (per cent) (Years) (Years) (per cent) (Years) (Years) 1990 3.9 28.7 8.4 6.8 15.0 7.3 1995 3.5 26.7 8.2 5.7 5.9 4.8 2000 5.5 24.0 6.6 4.3 5.1 4.8 2003 1.5 26.0 7.5 3.4 5.5 4.7 2004 2.1 26.6 6.7 3.6 7.3 4.8 2005 3.4 26.6 7.2 3.5 5.1 4.8 2006 3.8 25.0 6.5 4.4 4.8 3.6 2007 3.6 27.1 7.2 7.2 10.2 3.2 Source: Global Development Finance, 2009 4.4 Projections of Debt Service Payments 4.4.1 Debt service projections, which are based on long-term debt outstanding as at the end of March 2009, reveal that they will reach as high as US$ 22.8 billion in 2012-13. The repayment of NRI deposits and FII investment in debt securities are not included in the projections. The projections also do not include disbursement in pipeline. Table 4.7 : Projected Debt Service Payments (US$ million) Year Principal Interest Total 1 2 3 4 2009-10 11,277 3,093 14,370 2010-11 13,059 3,375 16,434 2011-12 16,819 3,817 20,636 2012-13 19,131 3,647 22,778 2013-14 13,755 2,523 16,278 2014-15 9,213 2,195 11,408 2015-16 7,496 1,924 9,420 2016-17 7,331 1,691 9,022 2017-18 6,063 1,462 7,525 2018-19 5,543 1,273 6,816 Note: Debt Service payment projections include external assistance, ECBs and FCCBs.

27 Figure 4.2: Projected Debt Service payments during 2009-10 to 2018-19 25,000 20,000 3,817 3,647 US $ million 15,000 10,000 3,093 3,375 16,819 19,131 2,523 2,195 1,924 1,691 5,000 11,277 13,059 13,755 9,213 7,496 7,331 1,462 1,273 6,063 5,543 0 2009 10 2010 11 2011 12 2012 13 2013 14 2014 15 2015 16 2016 17 2017 18 2018 19 Period (April-March) Principal Interest 4.4.2 The large debt service payments during 2011-12 to 2012-13 are primarily on account of higher repayments of ECBs during this period. Sovereign debt service payments during this period are estimated in the range of US$ 4.1-4.3 billion.