How Bad is it, Doctor?

"It’s too early to give out a message that the position is comfortable.Although there’s nothing to be alarmed about, there’s nothing to get complacentabout either," warns S.P. Gupta, director and chief executive, Indian Council forResearch on International Economic Relations. For one, the concessional proportion of thedebt is expected to dwindle. The debt-GDP ratio is on the way up, and so is debt-servicing(payment of interest and principal) as a proportion to export earnings. Nearly half thereserves is hot money—that is, foreign investment in the stock market and NRIdeposits, which can disappear in the blink of an eye. And although the increase in debtstems primarily from forex fluctuations, the bottomline is that its burden has to beborne. "The situation may worsen because of bunching of the IMF loan, the deadlinefor which falls in 1997," says Gupta.

"There is pressure on India to graduate from the International DevelopmentAssociation’s (IDA)—a World Bank-administered lending agency—assistanceprogramme, on the ground that in terms of its GDP, it’s losing eligibility forconcessional debt," says Indira Rajaraman, RBI chair professor, National Institute ofPublic Finance and Policy. IDA’s loans are given away at a practically zero interestrate to countries with an annual per capita GNP of less than $675 (India’s is around$330).

"IDA is now looking at an additional criterion of total GDP, tomake countries like India and China (who have monopolised three-fourths of the loans)graduate out and make space for others, such as those in sub-Saharan Africa," saysRajaraman.

According to the IDA’s revaluation on the basis of purchasingpower parity, the value of the rupee is close to Rs 10 to a dollar (as opposed to theofficial exchange rate of Rs 35.80) and the real GDP therefore is much higher than theofficial figure.

Add to this the "average" credit rating of the country, and the proportion ofconcessional debt can surely be seen plummeting. "As it is, banks are no longerinterested in lending to the Third World, a trend seen internationally," says SunandaSen, professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University."The cost of borrowing will definitely shoot up, as the composition of debt willbemore non-concession-al," warns B. Bhattacharya, dean (research), Indian Instituteof Foreign Trade.

The Government claims that in the absence of fluctuations in the exchange rate of thedollar with other currencies, the external debt would only have increased by $794 million. The value of debt in dollars went up as other currencies, such as the yen and the deutschemark, appreciated against the dollar. "But most of our debt is from the US, and hasto be paid in dollars. Even the debt in other currencies has to be mainly repaid by buyingthese currencies with dollars, as India has a trade deficit with these countries,"points out Gupta. "While the white paper has tried to project the burden of thedollar estimate of the $6.34 billion increase as notional, it’s real," addsBhattacharya.

It’s important to look at the big picture: the entire balance ofpayments (BOP), instead of external debt alone. The BOP comprises a current account(day-to-day dealings, showing the difference between exports and imports, and invisiblessuch as earnings from and payments for banking and insurance), and investment and othercapital transactions (which include companies’ purchase of assets, andgovernment’s borrowing). As the white paper puts it, "it is normal fordeveloping countries to run current account deficits which lead to some build-up ofexternal debt." But the returns on this sum invested should take care of both theinterest and the principal payment, which is in foreign currencies—primarily dollars,in India’s case. If it is not productively invested, a country may eventually fallinto a debt trap—taking new loans, entirely to pay for the old ones.

In an economy it is difficult to figure out exactly how much additional growth hastaken place with a particular amount invested. But there are indicators of how safe theBOP situation is. The debt-GDP ratio, for instance. "The growth rate of debt washigher than that of the economy in 1994-95, resulting in the debt-GDP ratio increasing by11 per cent. The white paper failed to mention this altogether," remarks Gupta. Whilethis ratio is galloping in dollar terms, with the depreciation of the rupee, it’sincreasing even faster in rupees.

ANOTHER, and a better, indicator would be the extent to which debt servicing erodesexport earnings. It suggests how much is available to foot the import bill. "As apercentage of export earnings, the debt service shot to 30.4 per cent in 1994-95, and isexpected to be substantially higher in 1995-96," says Ajit Mozoomdar, visitingprofessor, Centre for Policy Research. Conventionally, it has been considered safe toretain it at 25 per cent. "In the past, sometimes it has gone up to 30 per cent andcome down again. But now it is hovering at 30 per cent and rising. The white paper reallyplays down this liability by taking debt-service as a pro-portion of the current accountreceipts—which includes receipts from remittances—instead of checking it againstexport earnings. This suggests remittances are stable, but they may not be," he adds.Even the first-timer ratio using current account receipts, which paints a more favourablepicture, shows an increase from 25.1 per cent in 1993-94 to 26.7 per cent in 1994-95.

The statistics would have been worse, "but for the huge increasein the inflow of private remittances, a substantial rise in portfolio investment (byforeign institutional investors), and a draw-down on forex reserves, which were allowed tofall from $21 billion to $17 billion," says Bhattacharya. These inflows have nowshifted to a lower gear.

So, what does the future hold? If the current trends are indicative, weare heading toward an aggravated situation because the need for external borrowing isgoing to heighten. The total trade deficit is expected to hit the $4 billion mark in1995-96, $2 billion over 1994-95. "It’s hard to guess how bad the end of theyear will be—the trade deficit may be as high as $5.5 billion," says Mozoomdar.Performance of exports alone suggests that deceleration has set in. According to theCentre for Monitoring Indian Economy, in April-October 1995, exports at $17.2 billion werehigher by 24.5 per cent over the corresponding period in 1994. But the export growth isexpected to slow down to an average of 13 per cent per month in the last five months ofthis fiscal year.

The rise in imports is alarming too: expected to be higher by 25 per cent in 1995-96.Many believe that this increase, fuelled as it is by the import of capital goods, ishealthy. "But," asks Gupta, "if this is true, how come it’s notreflecting in investment or construction?" Forex reserves are plunging.April-September 1995 saw a decline of $1.8 billion—the combined result of lowercapital inflows and higher trade deficit. Net capital inflows through foreign aid, FDI,FII and GDR issues added up to $1.7 billion only, just half the amount raised in thecorresponding period in 1994.

Some are taking solace in India’s position being far better than the LatinAmerican countries. Hardly a reason to gloat over. Says Gupta: "What’s the pointin comparing ourselves with Latin American countries which rest on a history of huge debtand three-digit inflation rates? Theirs is a completely different story, with the entireUS coming to their rescue when in need." The Finance Ministry itself admits there iscause for concern. Time to pull up the seats and fasten the seat belts.