Wednesday, May 18, 2011



The level of external debt and problems of debt servicing burden have become a widely debated issue in India. Till the early 80s, external debt was not a major problem since• India had not resorted to much of market and market related external borrowings. But the trend of borrowing externally gained momentum in the late 80s. As a result, India's overall debt and debt-servicing burden increased over the 80s as well as in the growing magnitude of external debt has attracted increasing attention of the Government in the 90s. The Government of India and the Reserve Bank of India have introduced a number of measures to contain the growth of expensive external debt. These include:
• moderation in the interest rates on non-resident deposits,
• discontinuation of some high cost forms of non-resident deposits where the Government bore the exchange risk limits 011 external commercial borrowings and prioritization of such borrowings in favor of infrastructure, term lending institutions and exporters, a more open and pragmatic policy for non debt creating foreign direct investments. These measures' are being combined the an overall trade policy which gives top Priority to promoting exports.
In fact, India should go for a two pronged strategy to reduce its debt-service ratio:
(i) Encourage foreign direct investment inf1~w through further liberalization of foreign investment laws. Bureaucratic hurdles must be removed with an iron hand, to realize larger-inflow of foreign direct investment.
(ii) A big push to exports to grow at the rate of more than 20 percent annually.
Accelerating the development of infrastructure itself will give a big boost to export growth. Achieving current account balance, if not surplus, should be the medium term objective.
This strategy will reduce the need for external borrowings and bring down the debt servicing burden gradually.

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