India’s External Debt – A Concept


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.

 India's external debt statistics released in September 2013 for the quarters ending March and June are released by the Reserve Bank of India .The major developments relating to India’s external debt as at end-June 2013 are set out below:
- India’s external debt as at end-June 2013 recorded a decline over end-March 2013 largely due to valuation gains resulting from appreciation of US dollar against Indian rupee and other international currencies as well as decline in the level of external commercial borrowings (ECBs).
- India’s external debt, as at end-June 2013, was US$ 388.5 billion showing a decline of US$ 3.6 billion or 0.9 per cent over end-March 2013.
- In terms of major components, the share of External Commercial Borrowing (ECBs) continued to be the highest at 30.7 per cent of total external debt, followed by short term debt (24.9 per cent) and NRI deposits (18.3 per cent).
- The share of short-term debt in total debt rose over the preceding as well as corresponding quarter of the previous year. The long-term debt at US$ 291.8 billion and short-term debt at US$ 96.8 billion accounted for 75.1 per cent and 24.9 per cent, respectively, of the total external debt as at end-June 2013.
- The ratio of short-term debt (original maturity) to foreign exchange reserves rose to 34.3 per cent as at end-June 2013 from 33.1 per cent as at end-March 2013.
- Based on residual maturity, the short-term debt accounted for 43.8 per cent of total external debt as at end-June 2013. Within the short-term debt, the share of NRI deposits was 28.1 per cent.
- The valuation gain during the first quarter of 2013-14 amounted to US$ 9.5 billion reflecting the appreciation of US dollar against the Indian rupee and other major currencies. Thus, excluding the valuation gains, the stock of external debt as at end-June 2013 would have increased by 5.9 billion.
- The US Dollar denominated debt continued to be the largest with a share of 58.9 per cent in the total external debt as at end-June 2013, followed by Indian rupee (22.6 per cent), SDR (7.6 per cent), Japanese Yen (6.0 per cent) and Euro (3.2 per cent).
- Government (Sovereign) external debt stood at US$ 78.4 billion as at end-June 2013 as against US$ 81.7 billion as at end-March 2013. The shares of Government and non-Government external debt in the total external debt were 20.2 per cent and 79.8 per cent, respectively, as at end-June 2013.


                                     Terms Related to External Debt



External Commercial Borrowings (ECBs)
External Commercial Borrowings (ECB) refer to commercial loans [in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments (e.g. floating rate notes and fixed rate bonds)] availed from non-resident lenders with minimum average maturity of 3 years.
Foreign Currency Convertible bonds (FCCBs)
 Foreign Currency Convertible bonds (FCCBs) mean a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency. Further the bonds are required to be issued in accordance with the scheme viz., “Issue of Foreign Currency convertible bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993”, and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments.
Sovereign Debt
Bonds issued by a national government in a foreign currency, in order to finance the issuing country's growth. Sovereign debt is generally a riskier investment when it comes from a developing country, and a safer investment when it comes from a developed country. The stability of the issuing government is an important factor to consider, when assessing the risk of investing in sovereign debt, and sovereign credit ratings help investors weigh this risk.
External Debt
Gross external debt, at a point in time, is defined as “the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to non-residents by residents of an economy” (External Debt Statistics -Guide for Compilers and Users, International Monetary Fund (IMF), 2003).
Original and Residual Maturity                       
Original maturity is defined as the period encompassing the precise time of creation of the financial liability to its date of final maturity.
Debt by residual maturity (or remaining maturity) includes short term debt by original maturity of up to one year, combined with medium to long term debt repayment by original maturity falling due within the twelve month period following a reference date. External debt is commonly expressed in terms of original maturity.
Long and Short-term Deb
 One way of classifying external debt is into long and short-term. Long term debt is defined as debt with an original maturity of more than one year, while short term debt is defined as debt repayments on demand or with an original maturity of one year or less.
The coverage of short-term was redefined from 2005-06 by including supplier’s credit upto 180 days and FII investment in the Government Treasury Bills and other instruments and further in March 2007 by including external debt liabilities of the banking system and the investment in the Government securities by the foreign central banks and the international institutions.
 Multilateral and Bilateral Debt
 Multilateral creditors are primarily multilateral institutions such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development bank (ADB) etc. Bilateral creditors are sovereign countries with whom sovereign and non-sovereign entities enter into one-to-one loan arrangements. Some of India’s bilateral creditors who extend loans to both sovereign and non-sovereign debtors include Japan, Germany, United States, France, Netherlands, Russian Federation etc.
Sovereign (Government) and Non-Sovereign (Non-Government) debt
Sovereign debt includes (i) external debt outstanding on account of loans received by Government of India under the ‘external assistance’ programme, and civilian component of Rupee Debt; (ii) other Government debt comprising borrowings from IMF, defence debt component of Rupee debt as well as foreign currency defence debt and (iii) FII investment in Government Securities. Non-sovereign includes the remaining components of external debt
Trade Credits/Export Credits
Trade credits/Export credits refer to loans and credits extended for imports directly by overseas supplier, bank and financial institution to sovereign and non-sovereign entities. Depending on the source of finance, such credits can be either suppliers’ credit or buyers’ credit.
  Suppliers’ Credit: Such credit is extended by the overseas supplier of goods in the form of deferred payments.
  Buyers’ Credit: Such credit is provided by a bank or financial institution and is generally governed by OECD consensus terms and carries insurance from export credit agency of the concerned country.
External Commercial Borrowings
The definition of commercial borrowing includes loans from commercial banks, other commercial financial institutions, money raised through issue of securitized instruments like Bonds (including India Development Bonds (IDBs) and Resurgent India Bonds (RIBs)), Floating Rate Notes (FRN) etc. It also includes borrowings through Buyers’ credit & Supplier credit mechanism of the concerned countries, International Finance Corporation, Washington [IFC (W)], Nordic Investment Bank and private sector borrowings from Asian Development Bank (ADB).
NRI Deposits
Non-Resident Indian (NRI) deposits are of three types:           
(i)Non Resident (External) Rupee Account {NR(E)RA}
Non Resident (External) Rupee Account {NR(E)RA} Deposits were introduced in 1970. Any NRI can open an NRE account with funds remitted to India through a bank abroad. A NRE account maintained in Indian rupee may be opened as current, savings or term deposit. The amount held in these deposits together with the interest accrued can be repatriated.
(ii)Foreign Currency Non Resident (Banks) Deposits {FCNR (B)}
Foreign Currency Non Resident (Banks) Deposits {FCNR (B)} were introduced with effect from May 15, 1993. These are term deposits maintained only in Pound Sterling, U.S. dollar, Japanese Yen, Euro, Canadian dollar and Australian dollar. The minimum maturity period of these deposits was raised from six months to 1 year effective October 1999. From July 26, 2005, banks have been allowed to accept FCNR (B) deposits up to a maximum maturity period of five years against the earlier maximum limit of three years.
(iii)Non-Resident Ordinary Rupee (NRO) Accounts
Non-Resident Ordinary Rupee (NRO) Accounts – Any person residing outside India may open and maintain NRO account with an Authorised dealer or in authorised bank for the purpose of putting through bonafide transactions denominated in Indian Rupee. NRO Accounts may be opened/maintained in the form of current, saving, recurring or fixed deposits. NRI/Persons of Indian Origin (PIO) may remit an amount not exceeding USD 1 million per financial year out of the balances held in NRO Accounts.
Concessional Debt
Generally, a loan is defined as ‘concessional’ when it carries a grant element of 25 per cent or more. In India, loans from multilateral (the International Development Association (IDA), International Fund for Agricultural Development (IFAD)) and bilateral sources (including rupee debt that is serviced through exports) is categorized as ‘concessional’, based long maturity and less-than-market rates of interest charged on them.
Debt Service Ratio
Debt service ratio is measured by the proportion of total debt service payments (i.e. principal repayment plus interest payment) to current receipts (minus official transfers) of Balance of Payments (BoP). It indicates the claim that servicing of external debt makes on current receipts and is, therefore, a measure of strain on BoP due to servicing of debt service obligations.
                                                                                                                     Source: RBI



Monday, 21st Oct 2013, 09:58:55 AM

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