India External Debt: More than Meets the Eye

It has been claimed by the Government of India (GOI) that India’s  debt burden is not significant. In a report to the World Bank (India’s External Debt – A  Status Report, GOI, June, 1999), it has been stated that there has been  a considerable improvement in external indebtedness. However, the Status Report does not show certain commitments that the Government has made, for example, in the power sector (the guaranteeing of Enron revenue stream) which are akin to external debt. It is also clear from the composition of debt that private debt is becoming significant in the post liberalisation  era. If we look at the Latin American debt scenario of the 80’s  or the recent South East Asian crisis, it is clear that there is a risk of private debt being converted to public debt. Even if this conversion does not take place, the fear of private capital reneging on its debt and its impact on country’s credit rating can be used as an instrument to extract major policy concessions from the government. The migration from a fixed  license fee regime to a revenue sharing one is one such example.

India Indebtedness– Some Figures

India’s external debt stood at $ 95.72 billion at end December 1998. The debt service payment as a % of current receipts is of the order of 20% while the debt to GDP ratio is estimated to be of the order of 23.0%. While these are not a figures which appear to be dangerous by current international standards of indebtedness, India is now amongst the top 15 indebted countries in the world. Further, though the growth rate with the debt denominated in dollars appears small — increasing at an annual compound rate of 1.6% (1991-1998) — due to the erosion of the value of the rupee, the growth in rupee terms was 12.5% in the corresponding period. However, the short term debt as a proportion of the total debt — the major problem of the south-east and East Asian crisis — has come down substantially in this period and is now 3.8%.

In this period (1991-1998), there has been a substantial growth of non-government debt;  it has grown from $33.84 billion to $49.12 billion (51.3%) in the total debt of $95.72  billion today. While government has officially guaranteed only 15% of this private debt, public financial institutions gave various guarantees for most of the corporate borrowers. In effect, these operate in almost the same way  as government guarantees. The “bail out packages”  by public financial institutions for JK Corp.(Singhanias) and Ispat (Mittals) were essentially to prevent default on the external account by these companies. This was also what Essar was trying to engineer last year with the help of powerful allies in the Government and the help of public financial institutions.

It has also been seen when borrowings from major international banks are concerned, much of the bad private debt of private capital is finally assumed by the domestic governments of the borrowers. Thus, huge foreign borrowings that went to finance golf  courses and luxury buildings in S.Korea, Malaysia, Indonesia etc., finally were assumed by the concerned governments in some form or the other. The pressure of International financial institutions and powerful western government is such that in a crisis, a South Korea or Indonesia Government buckles down. The Governments in these countries are in any case closely intertwined with crony capitalists so that there is always a pressure to provide Government bail out to private capital.

Invisible Guarantees —  The Case of the Power Sector Reforms:

However, the above debt figures do not spell out the whole picture. In the Enron case, the State and the Central governments have not only guaranteed the  debt that Dhabol Power Corporation (Enron’s affiliate) have incurred but also have guaranteed the revenue stream of this 2015 MW plant for the next 20 years. It will be instructive to compare the loan amount to the total revenue stream being guaranteed over the life of the contract. The total loan that Dhabol  Power Corporation is incurring for the project is about $1.4 billion. The revenue stream that has been guaranteed over the next 20 years total  to an astronomical sum of $ 35 billion or  Rs. 1,25,000 Crore (Power Play, Abhay Mehta, Orient and Longman, 1999).

Even if we consider the Net Present Value(NPV) of this sum, it amounts to $ 17 billion. Obviously, the Enron guarantees charge India’s debt figures considerably if these guarantees are considered as long term debt. Incidentally, Enron was the first case where revenue stream has been guaranteed in the country and came up against sharp public criticism on this count.

Enron is not the only example where revenue stream has been guaranteed. Certain other fast track projects – Jegurupadu for  example, have got similar guarantees while others are still trying to negotiate the same. One of the reasons for Cogentrix  backing out of the 1000 MW Mangalore Project was because under the changed guidelines now, only the loan portion is guaranteed and not revenue streams.

While the loan portion in the investment of the power sector companies are from external sources (Exim Bank US, other foreign banks), however, Indian financial institutions have to give counter guarantees to their foreign counterparts. Thus, the Exim Bank Loan in the Enron case is counter guaranteed by  Industrial Development Bank of India (IDBI). This is the pattern for all the loans that are incurred by the Independent Power Producers (IPPs). Even though, these loans are not shown as covered by government guarantees, the public financial institution guarantees will ensure that these become public debt if the IPPs fail  to deliver their promise.

The Telecom Sector – using  Public Debt to Renege on Contracts:-

Another “innovative” use that Indian Private Capital has made with regards to foreign debt, is to plead that if the private telecom companies fold up, their foreign  debtors would lose confidence in India leading to a major financial crisis for the country. The “business friendly” government used this argument of investor confidence to change the terms of the existing contract and relieve them of their future license fee liabilities.

When the basic service and licenses were tendered out in 1996, the private companies had quoted very high figures for license fees. Himachal Futuristics had quoted an astronomical sum of Rs.85,000 crore for 15 years licenses of 8 states. The cellular licenses also saw similar high bids. Though Himachal  Futuristics  pulled out of their bids, the total committed amount in license fees for all the successful bidders totalled to about Rs.50,000 crore.

However, soon after the licenses were awarded, the private parties started arguing that they had made a mistake regarding the market and these license fees were not sustainable. They also argued that Indian and Foreign Financial Institutions had invested heavily in private telecom companies. Therefore, if they were not “bailed out”   by relieving them of their committed license fee amounts, these Financial Institutions would suffer huge losses and the investor confidence in the country would suffer. Major international players as well as foreign governments also interceded on their behalf. The result was that the Minister of Communications  Jagmohan, was shunted out of the ministry as the did not agree to such revisions of the contracts and the entire future license fees amounting to about Rs.50,000 crore was waived off!

Thus, investor confidence, the euphemism for a friendly foreign investment climate, implies that all foreign investments and loans in the country’s economy need to be “protected” by the Government in one form or the other. While in the power sector, the foreign investors want guarantees for all future revenues, in the telecom sector, they were asking for a drastic reduction of the liabilities — license fees — for the companies where they had put in the money. Under the new globalising paradigm, private and foreign capital need subsidies and protection, while the people have to contend with “free market” and no subsidies.


It is true that India’s balance of payments and the debt servicing capabilities are not in any imminent danger on account of its indebtedness, even though it is now one of the world’s biggest debtors. However, this comfortable scenario is more apparent than real. The foreign exchange reserves consist of large amounts of “hot money”, money that can flow out quickly creating an immediate balance of payment crisis. Further, the debt figures do not reveal the true state of indebtedness. The commitments given by the central and state governments regarding future payments to power companies should be added to the debt figures to show the true indebtedness of the economy. The Government figure of guarantees for non-government commercial borrowings also underestimate the actual guarantees as it does not take into account the guarantees given by the public financial institutions. While the external debt is not as dangerous as in certain Latin American or African countries, there is legitimate cause for concern regarding India’s indebtedness. Meanwhile, as the paymasters decide the tunes the piper has to play, important policy changes are being introduced to keep India’s debtors happy.

Courtesy: Social Acion 2000/50/2/191(Publication of ISI)

Social Acion 2000/50/2/191(Publication of ISI)