Points of interest

How often have you seen the elder in a family placing a gold necklace around a newborn? Don’t bother! Fate has already placed a chain around the child — an iron chain of debt. As of March 31, 2001, India’s external debt stood at Rs 467,589 crore, approximately $100 billion. India’s population touched the one billion mark this year. So every Indian — man or woman, adult or newborn — owes $100 to the rest of the world. Small wonder that infant comes out howling — he is in debt to the tune of Rs 5,000 from the moment he draws his first breath!

It is a bit of a cliche that the Chinese symbol for crisis may also be interpreted as that for opportunity. Well, every cliche is rooted in truth, and never more so than when referring to this debt problem. Because right now India has an excellent chance of cutting its debt servicing cost by a whopping 50 per cent.

How? Thanks, oddly enough, to the ongoing global recession. Following the US Federal Reserve’s lead, banks across the world have whittled away at interest rates. And this ties in directly into India’s repayment problem. Of the whole debt, only 38.5 per cent was procured on concessional terms, from the World Bank and the International Monetary Fund. The remainder, 61.5 per cent, was taken on strictly commercial terms — meaning the highest interest rates that lenders could induce India to swallow.

How high was this? Well, it ranges from 9 to 10 per cent. Translated into rupee terms that comes to 14-15 per cent per annum because of depreciation of the rupee against the dollar. Before cursing the ministers who saddled future generations with this debt, it behoves us to remember a few points.

First, don’t forget where 40 years of crackpot socialism left us — a stage where the Government of India had to restore confidence in the Indian economy by any means possible. India needed significant inflows to augment foreign exchange reserves which had all but vanished.

Second, don’t lay all the blame at the bureaucracy’s doors. The private sector must assume its fair share of blame; several firms rushed off when the ECB (External Commercial Borrowings) window was opened in 1995. That happened to be when US interest rates — consequently, those of the rest of the world — were on the steep side.

Unfortunately, much of this borrowing was for a fairly short maturity period, usually for five years or so. We are paying more interest on what we borrowed, and the bills will fall due much sooner. It is a one-two punch that an Ali or a Tyson would have envied. So much for the crisis, where, you may wonder, is the opportunity I spoke of? Chew over these facts.

India’s foreign exchange reserves have been rising steadily and stand at over $40 billion. Oil prices have remained amazingly steady despite the American war. Finally, as stated earlier, global interest rates are very, very low. This opens up a window of opportunity, but it is up to the men in the Ministry of Finance to step through it.

Several schemes come to mind. For instance, the government raises money internally with five-year bonds which carry a guaranteed return of 7.25 per cent. Internal borrowing doesn’t carry the additional burden of depreciation against the dollar. It might make sense for the government to raise money internally to pay off those external debts. One might even raise money at 10 per cent — still well under that 14-15 per cent which external borrowing required.

However, India doesn’t have to go that far. You can forget about those five-year loans at 9-10 per cent interest. It is now possible for India to raise a 30-year loan, with interest charged at a reasonable 3 per cent (or less) per annum. In other words, India could conceivably borrow enough today to pay off all those old, high-interest loans we took on in past years. That would save billions of dollars.

For instance, the Government of India raised $4.1 billion on the Resurgent India Bonds Scheme in 1998. What happens if India borrows at today’s cheaper rates, and uses the money to permit early redemption? Well, this shaves off almost 300 basis points per annum. That means India saves roughly $250 million (about Rs 1,200 crore) immediately on interest payments.

That goes for private-sector borrowing too. The Government of India should encourage all these firms to pay back their old debts as soon as possible. Frankly, borrowing within India makes more commercial sense.

As I noted, every Indian is stuck with a debt of about Rs 5,000. Interest on this sum, at the current real rate (that is, after taking depreciation of the rupee into account) is almost 15 per cent per annum — Rs 750. This comes to a little over Rs 2 a day for every day of the year for every Indian.

Forget about the low rates available abroad such as the 3 per cent I mentioned. Assume that the Government of India goes in only for the 7.25 per cent per annum it pays on government securities. Assume that it raises enough to pay off the old debts, and does just that. That sum of Rs 5,000 might still be a fetter around that mewling infant. (And his elders!) But the annual interest on that sum has suddenly fallen to Rs 362.50.

What does that mean? Simply this: the interest due on the loan was once mounting up at over Rs 2 a day. At 7.25 per cent, it comes to less than Re 1 per day.

Restructuring India’s total external debts in the manner I suggest will, of course, lead to meaningful savings for the Government of India. With luck, it will encourage the private sector to think afresh by removing the burden of debt. It may send a signal to the international financial community that the guardians of the Indian economy are willing to take innovative, pro-active steps to kickstart their way out of a recession.

If the credit rating agencies — Moody’s, S&P, and so on — are so convinced, they could raise India’s rating. That, in turn, means India can borrow at a lower rate. We are, in effect, talking about a virtuous spiral.

Economics is called the dismal science, and I am sure some economist is filling his buckets to spray cold water over the scheme I propose. But it just seems to make sense to me; how about you?

Tailpiece: Six weeks ago, I mentioned the scandalous manner in which Mauritius-based Overseas Corporate Bodies were draining India. Happily, the Reserve Bank has plugged this loophole. However, Rs 4,000 crore has been lost; shouldn’t the Joint Parliamentary Committee investigate the OCB windfall, as also those foreign institutional investors which operate from Mumbai while giving out an address in Mauritius?

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