Dr Ashwani Mahajan
One of the major arguments in favour of the new economic policy was that, due to widening of current account deficit in balance of payment and balance of trade, rising foreign debt has been causing erosion of national sovereignty and possibilities of growth were shrinking. Under these circumstances, it was argued that the nation can save itself from crisis only by taking the path of Liberalisation, Privatisation and Globalisation (LPG); and we can also make the nation debt free and save its sovereignty. When country’s gold was being sent abroad as ‘security’ for our international liabilities that was not only a cause of concern, but was humiliating too for the nation. It was said that to overcome that situation we will have to lift all restrictions on imports and widen our paths for letting foreigners to invest in India. This policy would not only provide resources for our development, but also create competitive environment, necessary for the development of Indian industry.
Restrictions, both tariff and non-tariff, were removed from imports. Imports started rising fast. Exports too increased, but exports could grow at much slower pace. Result obviously was fast rising trade deficit. Country was exposed to high risk of current account deficit (CAD). However, at that point of time, progress in the field of software, led to huge receipts on invisible account (in which there was hardly any contribution of new economic policy of LPG). NRIs remittances also have been increasing in leaps and bounds. Current account deficit in balance of payments remained within reasonable limits; as a result of these developments, despite huge trade deficit, it so happened that between 2001-02 and 2003-04, the nation had a pleasant experience of balance of payment turning surplus for continuously three years, which was unprecedented after the post independence period.
CAD now exceeds even 1990-91 Level
While presenting budget 2013-14, Finance Minister, P. Chidambaram expressed concern over rising CAD. Similar concerns have been expressed by the Prime Minister and Reserve Bank of India (RBI). This concern is not without reasons. In the last few years, our CAD has continuously been rising. Since 2004-05, this deficit is not showing any sign of receding. In the last 8 years, our balance of trade totaled $ 797 billion and BOP (CAD) totaled $ 227.8 billion. However, in 10 years between 1990-91 and 1999-00, they were hardly $ 103.6 billion and $ 43.7 billion respectively. That is, in 1990s our CAD was average $ 4.4 billion annually, which climbed up to $ 28.5 billion annually in the last 8 years (6.5 times increase). Deficit is BOT (Balance of Trade) has been keeping so high after 2004, that despite huge remittances from NRIs and receipts on account of software, exports, our CAD continued to show deficit. In the year 2012-13, our CAD may surpass $ 100 billion which has been worrying our police makers, economists and the general public. CAD which was hardly 3.3 percent even in 1990-91 (year of major economic crisis) has climbed up to 6.7 percent during the third quarter of the financial year 2012-13. Our foreign exchange reserves, which were sufficient to finance our import bill for 3 years in 2007, are not capable to pay for imports of 6 months even. Huge CAD had a side effect in the form of rising foreign debt, which turned $ 374 billion in 2012 (December), as compound to only $ 224.5 billion in March 2009. This foreign debt does not include borrowings, which have been made by Indian companies abroad.
Foreign Debt Trap
Our foreign debt has been rising continuously and the same is making situation of our payment deficit even more acute. We understand that foreign debt involves the burden of repayment of principal and interest. Such a huge foreign debt can trap the country into impossibility of repayment of interest and principal. Debt of the country has increased by $ 150 billion in last less than four years. This huge mounting of debt has exposed the country to increased commitment of repayment. Inability to make this payment from regular surplus in balance of payment pushes the country to further debt. These liabilities are not receding at all, rather year after year, they are rising further. If we look at the experience in the last 8-9 years, we find that rising balance of trade is not the only cause of rising foreign indebtedness, repayment of loans (both interest and principal) is also causing this debt to rise further. As per data released by the World Bank, in 2011, repayment of interest and principal, on the external debt of India reached $ 29.2 billion.
Another big cause of our foreign debt to rise is foreign direct investment and portfolio investment. Though our finance minister advocates for foreign investment, not for pushing growth any more, but to fill CAD in balance of payment; fact is that foreign investment is actually widening this deficit. During the year 2011-12, a total sum of $22 billion was received under the head FDI; however, foreigners took away $26 billion in the form of interest, dividend, royalty etc. This means outgo of foreign exchange on incomes earned from investments made in the yester years, exceeded that of receipts from current FDI.
In addition to this, borrowings made by Indian companies abroad also entails, liabilities in the form of interest and principal repayments; which further widens balance of payment deficit. Total inflow of investment by FIIs has been $ 186.1, until 2012-13. But this source of investment not a dependable one, as this investment may evaporate any time. It is notable that during the year 2008, portfolio investment turned negative, as institutional investors flew away. Earnings from portfolio investment remitted abroad also tend to widen balance of payment deficit.
Debt trap is a situation when size of debt becomes so big that it is beyond to repay the same from its own resources, and is forced to borrow further to fulfill its obligation to repay principal and interest. If we analyze the repayment of principal and interest, the same becomes very clear. According to official data released by World Bank, between December 2009 and December 2012, total debt servicing on external debt by India was around $100 billion and addition to external debt during this period was around $150 billion. Need of the hour is that government rises to the occasion and adopt suitable policy to stem this fast rising size of foreign debt and save India from getting trapped into this debt vortex.
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