K.L. Prasad, Adviser, Ministry of Finance, writes:
While the debt figures in the news story “India has to repay $172 billion debt by March 2014” (The Hindu, Page 1, June 29, 2013) are broadly reflected correctly, the data on the short-term debt at end-March 2008 is incorrect. Short-term debt by residual maturity was actually placed at U.S.$82 billion and constituted 27 per cent of the foreign exchange reserves at end-March 2008 and not U.S.$54.7 billion or 17 per cent of the total foreign exchange reserves. This would mean the rate of increase in such short-term debt from 2008 to 2013 is lower.
In addition, the story’s subtitle that the burden triples in six years has not been explained clearly. The obvious reference is to the indicator “short term debt by residual maturity,” which has broadly doubled in actual terms in view of the clarification on data given above. The subtitle that the outflow will deplete 60 per cent of forex reserves conveys a wrong message that external debt will be repaid from forex reserves, which has never been the case and, as correctly observed in the text of the article, is a theoretical exercise.
The article states that measured by the indicator “short-term debt by residual maturity,” India’s vulnerability to slowing capital flows and debt servicing have gone up. The extent of the deterioration is mentioned in the RBI’s Press Release on External Debt dated June 27, 2013. It is apparent therefrom that the debt service ratio in 2013 is lower than 2012. In so far as the deterioration in the ratio of external debt to GDP is concerned, this is marginal (21.2 per cent in 2013 as against 20.3 per cent in 2009). The deterioration in respect of vulnerability indicators to foreign exchange reserves owes largely to the shift away from the active exchange rate intervention policy of the RBI since 2008-09. This implied that while foreign exchange reserves did not go up as a consequence, there has been a steady growth in imports as well as short-term trade credits which are a natural concomitant of the rise in imports. Even in the face of a major global crisis in 2008-09, which some analysts call a near-sudden stop, the reserve drawdown on BoP basis was minimal. As such, there is no merit in reading too much in the traditional reserve covers.
The article also says that ECBs are now 31 per cent of the country’s external debt. ECBs are essentially long-term debt and, as a matter of policy, preferred to short-term debt. Some of these do mature in 2013-14 which have to be either rolled over or paid back by corporates. However, as long as such flows are positive on a net basis (BoP accounts), these are going to help finance the current account deficit (CAD). A focus on the disbursement side of the flows alone is a flawed approach and would make it appear that the problem is serious, when that is not the case. There has been no spurt in the level of the ECBs that have to be paid back or rolled over in 2013-14.
NRI deposits are a major component of the short-term debt by residual maturity. These have been typically rolled over year after year. Besides, NRI deposits are a major source of the capital flows on a net basis that help finance CAD and withdrawals are partly done in rupee terms domestically.
In light of the above, while some of the indicators reflect vulnerability, a focus on these indicators beyond a point only stokes perceptions of vulnerability. The fact remains that in 2012-13, the CAD was financed by capital flows fully and we added U.S.$3.8 billion to reserves — a point that the article does not take note of. Every effort will be made this year too to fully finance the CAD.
M.K. Venu replies: The Finance Ministry’s very first observation is The Hindu story reflects the foreign debt figures “broadly correctly.” The only figure the ministry is contesting relates to the short-term debt with one year residual maturity as on March 31, 2008. The ministry says The Hindu understates this figure because some items which the RBI adds to the short-term debt are not factored in by the Finance Ministry calculation for 2008. The ministry makes the point that the RBI figures of 2013 must be compared with the RBI figures of 2008. This point is well taken, though one would expect the RBI and Finance Ministry to give out the same figure in the future, to avoid confusion. The ministry also admits that some foreign debt related indicators do reflect vulnerability. The larger theme of the article is not denied.