At a time when developing countries like Brazil are experiencing serious difficulties servicing their external debt, the good news is that Indias stock of debt declined by 2.9 per cent to $98.4 billion as on December 31, 2001. This is a tribute to the governments careful management of its external accounts in view of the destabilising role indebtedness has played in Latin America during the 1980s and 1990s. To be sure, India was never in serious danger of falling into an external debt trap. Its debt-GDP ratio has always been somewhat modest in comparison with Latin American countries: It now stands at 21 per cent when compared to 75 per cent for Brazil. The government has been able to retire some of its debt, thanks to the burgeoning foreign exchange reserves of $65 bn and a healthy balance of payments situation. The pre-payment of costlier debt of $700 million last fiscal is expected to be followed by a larger pre-payment of $2 bn this fiscal. There is scope for more reduction, if the government encourages refinance of high cost external commercial borrowings by India Inc amounting to $17 bn. Instead of paying a huge interest burden of $2.38 bn, it perhaps makes eminent sense to pre-pay this entire amount and raise fresh loans at lower rates of interest.
While a lower external debt profile is the good news, the bad news is on the internal debt front. With the governments inability to rein in the fiscal deficits throughout the 1990s, there are strong indications that the country already is facing an internal debt trap. As the centre has resorted to large scale borrowings to meet even housekeeping expenditures, interest payments alone account for 44 per cent of non-plan revenue expenditures in the union budget. The centres stock of internal debt to GDP alone is 40 per cent, which goes up to 56 per cent if other liabilities are added in. Importantly, this ratio is rigid downwards but flexible upwards as nominal GDP growth now is similar to the interest rate on government borrowings. The explosive nature of the famous economist Evsey Domars equation will be felt when nominal GDP growth declines below the rate of interest, when debt servicing will rapidly eat up the entire GDP. Unless the fiscal situation is brought under control, that grim prospect stares the nation in the face. This daunting challenge must be kept in mind before uncorking the bubbly for the progress in lowering external indebtedness.