By Jayashree Jakhade

In the millennium Budget 2000 finance minister Yashwant Sinha has adopted many hard hitting measures. The most significant among them being the announcement that there would be no roll backs. In this the FM has been very fortunate as all macro economic parameters favour this strong stance taken by him.

Consider: Indian industry which has been groping in the dark for the past two to three years has started showing signs of a turnaround, exports are up at 13 per cent from a negative growth recorded last year, India's GDP has been on a steady uptrend at an average six to seven per cent and most importantly although the fiscal deficit is still a worrisome factor, the FM has stated that all efforts would be made to curb unnecessary expenditure and contain the fiscal deficit to around five per cent of the GDP.

Favourable debt scenario
The budget does not talk much about the external sector. This, evidently because there are no signs of alarm on the country's external debt front. Yes, the external debt figures appear inflated at US US $99 billion. But, the external debt situation is well under control going by the key indicators such as annual debt service ratio, the short-term component in the outstanding debt figure and the proportion of debt in the country's gross domestic product (GDP). These are on stable ground.

The Status Report on External Debt released by the finance ministry is also reassuring. The report states the country's total outstanding foreign debt, as on end December 1999, to be US $99,005 million which is marginally higher than US $93,290 million for the year ended March 1999 and almost on par with the year ended March 1995 peak of US $99,008 million.

It is good news on the debt servicing front too which indicates the country's export earnings and other current earnings (through remittances, tourism, etc.,) that goes towards paying interest and principal amounts on past borrowings. Only the foreign debt figure of US $99 billion for the year ended December 1999 shows a deterioration. All other key debt indicators indicate an improvement over the year. For instance, the debt service ratio is down from 35.3 per cent in 1990-91 to 18.2 per cent in December 1999.

The debt to GDP ratio has lowered to 22.3 per cent -almost half of what it was in 1991-92. And, as against more than a third of our current receipts going towards services -- the country's debt obligations in 1990-91-today it is less than a fifth of our current receipts which is sufficient to service our debt. Hence, the FM's no-worry attitude towards the country's external debt. There have been peaks in the levels of external debt, but by far it has remained fairly steady.

Timely budget proposals boosting growth have also helped in bridging the external debt gap. Usually, when the country's GDP rises the external debt gap also reduces. In the Eighties, when the Indian economy was facing rough weather, the country's total external debt was not large. But, the composition of debt was an area of concern. Indicators such as debt service and debt-GDP ratio were very high which gave India a poor international credit rating.

Composition of debt
A look at the micro component of debt shows that it is short-term debt which is an area of concern and is a critical measure of the vulnerability of the economy to external shocks. Significantly, the country's short-term debt is down from 10.2 per cent in March 1991 to 4.7 per cent in December 1999. But again, a controversy about statistical illusions arises here and the government has been much criticised for having covered up the short-term debt by using the measure of "original" instead of "remaining" for calculation purposes.

Put differently, the government has been including only debt obligations with an original maturity of up to one year and omitting long-term obligations maturing within the year. Contrary to widespread belief, the country's short-term debt by remaining maturity is 10.8 per cent.

Improved position
However, when compared with the other emerging economies, India is today better placed if one does a trend analysis over the years. India's external debt to gross national product (GNP) at the end of 1998 is second lowest after China from among the top fifteen debtor nations in the world.

Even as this may be the case, India is still looked upon as a moderately indebted nation rather than a less indebted country according to World Bank classifications. Therefore, India should be cautious and try and exercise care in taking on external commitments. As it is not very far when India will join the less indebted nations' group.

Today, debt burden as a parameter to gauge the economic health of a country is losing importance following an overall improvement in the Indian economy. The debt indicators including the debt to GDP ratio and debt service ratio have all performed well and are on a continuous declining trend. After the Mexican crisis globally attention has shifted to composition of debt and not only the overall debt.

Experts and monetary analysts believe that hot money flows were responsible for the economy's collapse. From this point of view too, India's external debt has been under control with the share of short-term debt in total debt falling steadily.

Although the overall figure of US US $99 billion is worrisome and that India’s external debt has shot up by four billion US dollars in one year, there is not much worry about it in financial circles. The major indicators of external debt are in control and showing definite signs of quality of debt improving. The external debt to gross domestic product (GDP) of the country stood at 22.3 per cent in December 1999 as compared to 24.4 per cent in March 1998. The ratio was at its peak at 41 per cent in 1992.

When we compare India's external debt position with the rest of the world, it can be seen that in terms of absolute level of debt India has definitely improved. India's position has improved from the third largest debtor after Brazil and Mexico in 1991 to ninth in 1998. Even if today India's debt has come back to the 1995 level, the key debt indicators have continued to improve making external debt manageable.

It was in the past decade that India's external debt situation was worrisome as the components were proving difficult to tackle. Now India's debt quality has improved and favourable debt-GDP and debt to service ratios all go to prove that we are much better off today than in the past.

Stress on short-term debt
It was after the Mexican crisis and the South East Asian crisis that monetary analysts stressed on short-term debt which being very vulnerable can press the panic button for an economy. Short-term debt is not long lasting, is very unstable in nature and is basically diverted towards the bourses. It flows in easily and flows out equally smoothly and in large amounts causing shocks.

Out of India's total external debt 94.34 billion constituted long-term debt while short-term debt constituted a mere 4.67 billion. The debt service ratio has declined from a peak of 35.3 per cent of current receipts in 1990-91 to 19.0 per cent in 1998-99. This indicates that India today needs less than one-fifth of debt to meet its obligations This is going in the right direction in making India's overall economic performance improve.

So, what the current finance minister and future FMs should keep in mind is to see to it that India's debt is retired at the earliest before the components change their course and disfavour the Indian economy. Today, India is far better off than most of the other emerging developing countries as there is growth potential which is still not exhausted which if fully tapped will help in reducing the debt burden.Micro indicators are very positive and that is why the Finance Minister seems to be least worried about what is happening on the external front.

India needs to continue with its growth-achieving objectives that of higher exports, pruning fiscal expenditure and proper management of its expenses. If India does not control the internal debt situation, it is bound to depend on the external front for getting in the necessary finances for its future investment needs. The government till today is playing safe and year-on-year is reducing its debt burden by paying off part of its debt. But, so far the government has only paid off its concessional debt which has the least interest burden what it should try and do is to pay off the high interest loan debt.

There is a major debate which is going on in international financial circles wherein it is being argued that most of the debt that is sanctioned to India is remaining idle.What India should try and see is to utilise this debt in projects which have a high growth potential and thus in the long run help reduce the overall debt burden.