EXTERNAL DEBT AND DEBT SERVICING BURDEN

EXTERNAL DEBT AND DEBT SERVICING BURDEN

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.

various kinds of external debt , need for external debt and its implications.

Describe the various kinds of external debt and discuss the need for external debt and its implications.


External debt may be broadly classified under eight kinds. These include multilateral, bilateral and commercial loans and cover both the Government and non-government sectors. These also comprise highly concessional loans as well as loans on market terms.

(i) Multilateral Debt
This refers to loans and credits extended by multilateral organizations to the Government or, in some cases, with Government guarantee, to Public and Private sector corporate bodies. This includes long-term credits (40 years) of International Development Association (IDA) and long-term loans from the World Bank or the Asian Development Bank (ADB), which have market interest rates and long repayment period (15-20 years).


(ii) Bilateral Loans
This refers to borrowing on varying degrees of concessionality, from other governments. Such loans are given to the government and in some cases to public sector organizations.

(iii) Loans from the International Monetary Fund (IMF)
The IMF debt assumed significance in the early 1980s, when India resorted to withdrawals under the Extended Fund Facility (EFF)/supplementary Financing Facility (SFF) to ease out the balance of payments difficulties.

(iv) Export Credit
This comprises buyers’ credit, suppliers’ and exports credit for defense purchases. Buyers’ credit and suppliers’ credit are treated as forms of commercial borrowing.

(v) Commercial borrowing
This includes market borrowings abroad by corporate entities and public sector undertakings and includes commercial bank loans, securitized borrowings (including India Development Bonds) and loans or securitized borrowings with multilateral or bilateral guarantees. Commercial borrowings also include loans from International Finance Corporation (IFC), Washington, and self-liquidating loans.

(vi) Non-Resident Deposits
This refers to various types of Non-Resident (NR) deposits and Foreign Currency (Banks & others) Deposits (FC (B&O) D) with maturities of over one year.

(vii) Rupee Debt
This refers to debt denomination in rupees owed to Russia (with some very small amounts owed to other East European Countries) and paid through exports. Rupee debt is broken up into a defense and a civilian component. Since March 1990. The civilian component of rupee debt has also included rupee supplier’s credits.

(viii) Short-term debt
This refers to debt with a maturity period of upto one year. This is usually trade related debt.
The first seven categories may be termed as long-term debt. The eighth category is short term, as the very name suggests. A comprehensive definition of India’s external debt must include all these items although in different contexts external debt is defined to include only some of these kinds.