ICAI Notes 6.8 - External Debt | Business Economics for CA Foundation PDF Download

Learning Objectives

• understand the types of external assistance received by India.
• know the changes that have taken place over the years in the structure of external assistance received by India.

 8.0 EXTERNAL DEBTS IN INDIA

Since no country is self-sufficient, it has to rely on other countries and international organizations for financial assistance. This is especially true for a developing country which is on the path of development. It needs funds for its various developmental projects. India is no exception. Ever since Independence it has relied on other countries for external assistance. External assistance to India has been in two forms – grants and loans. While grants do not involve any repayment obligation, loans carry an obligation to pay interest and repay the principal. About 90 per cent of the external assistance received by India has been in the form of loans. These loans have been from different sources like World Bank, International Monetary Fund (IMF), International Development Association, U.S.A., U.K., Japan, etc. A large part of the loan, especially from multilateral and bilateral agencies has high degree of concessionability i.e., grant element of at least 25 per cent. The share of concessional debt in total debt now is about 20 per cent. At one time (1980-81) it was as high as 75 per cent.

India’s external debt amounted to Rs 13,470 crore at the end of March 1981. As liberal use of borrowing has been made ever since then, the external debt stood at more than Rs 4,80,000 crore at end March 2002 and nearly 9,00,000 crore at end March 2008. As per cent of GDP, India’s external debt was 11.7 per cent at end March 1991; it became 21 per cent at end March 2002 but reduced to 19 per cent at end March 2008. Debt service ratio i.e. the ratio of gross debt service payments (principal and interest) to external current receipts was as high as 35.3 in 1990-91; it declined to 13.7 per cent in 2001-02 and further to 5.4 in 2007-08.

In terms of indebtedness classification, the World Bank has categorized India as a less indebted country since 1999. Among the top 15 debtor countries of the world, India improved its rank from third debtor after Brazil and Mexico in 1991 to ninth in 2001 after Brazil, China, Mexico, Russian Federation, Argentina, Indonesia, Turkey and Korea Republic and further to sixth after Russian Federation, China, Turkey, Brazil and Poland in 2008.

It needs to be also recognized that the debt service ratio (ratio of principal and interest to total exports) for India remains high by international standards. Besides, India’s exports of goods as a percentage of GDP works out to be around 14 per cent. This ratio which represents the potential capacity of the nation to service external debt, being relatively low, makes India vulnerable to external shocks. This, therefore, underscores the need for sustaining the growth in exports and invisibles.

SUMMARY 

Like any developing economy, India has had been facing financial crunch. Therefore, it relies on other countries and international organisations for financial assistance. Financial assistance has been in two forms – grants and loans. Till 1980-81, the percentage of grants in total external assistance to India had been quite high. But now, the percentage of commercial loans in total assistance is increasing. India needs to push up its exports so its capability of repaying the loans strengthens.