debt management final

8/4/2019 Debt Management Final

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DebtManagement:An Indian Perspective


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Agenda

IntroductionNilesh

Governments say on DebtAmit

External & Internal DebtKapil Countries comparisonRajsekhar

RBI steps on DebtSoumitra US Debt Crisis & ImpactRahul


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Introduction

ByNileshNarayanan


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Public Debt or Government Debt

It is the debt incurred by the government in mobilizingsavings of the people in the forms of loans, which are

to be repaid at a future date with interest.

Classical economist like Hume and Adam Smithcondemned the concept of public borrowing.

It was J.M . Keyenes, the pioneer who broughtabout a marked change in the economic thinkingtowards Public borrowing.

Introduction


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What leads to Public borrowing Government outlay in public sector

projects

Central and State government lending tothe private sector for investment inplanned development projects.

Public borrowing to meet the currentdeficits in budget.


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Types of Debt

Classification of Public Debt

Internal & External Debts

Productive and Unproductive debt

Long term and Short term debt

Voluntary or Compulsory debt


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Public Debt Management and itsObjectiveEffective public debt management is the cornerstoneof financial stability and sustainable fiscal policy. Agovernment's debt portfolio is often the largest in thecountry and can generate substantial risk to itsbalance sheet, with potential to undermine key

development objectives.


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Public debt management is the process of establishingand implementing a strategy for prudently managingthe governments debt in order to meet the

governments financing needs, its cost and riskobjectives, and any other debt management goals thegovernment may have set.

Ensure the financing needs of the government

Minimize the borrowing cost

Keep risks at an acceptable level

Development and well functioning of the domesticmarket


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Governments say on Debt

ByAmitBijalwan


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Government on National DebtMajor Problems

Indian economy is your large budget deficit and the

resulting high level of national debtThe combined central government debt is now

close to 75 percent of GDPLarge fiscal deficits have a variety of adverse

consequences: Reducing economic growth, Lowering real incomes Increasing the risk of financial and economic

crises Fiscal deficits can also lead to inflation

If India did not have its current central governmentdeficit of some 6 percent of GDP, the gross rate ofcapital formation could rise form 24 % of GDP to

30%.


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Government on National Debt Indias fundamentals remain strong

Financial sector robust

Monetary policy sufficient instruments, flexible

Corporate sector not too leveraged secondround of restructuring going on productivity

gains Foreign direct investment buoyant

Agriculture improving

Growth domestically financed

Indian economy should be able to recover fastand return to 9%+ growth path


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Government on National DebtWhile acknowledging that India was impacted, theeffort was to play down the likely intensity of thatimpact.

Our institutions are strong and [we] are prepared toaddress any concern that may arise on account of the

presentsituation,Finance Minister Pranab Mukherjee

The government will fast track the implementation ofthe pending reforms and keep a close eye on

international developments.


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Government Policies

Adoption of transparent policies to help economic agents

better plan their activities and minimize risk and cost. Policy actions to reflect concerns emerging from the

interface between domestic and global economic

environment.

Conscious build-up of foreign exchange reserves toprovide effective insurance against external sector

uncertainties

Future focus is on building debt sustainability benchmarks

for the sovereign external debt by linking with:

Domestic debt for fiscal sustainability

Total external debt for BOP sustainability

Contingent external liability for extreme case scenario


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Internal & External Debt

ByKapilMohanGupta


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IndiaGDP Growth


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IndiaDebt to GDP ratio

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

2005-06 2006-07 2007-08 2008-09 2009-2010 2010-2011

India External Debt (as %of GDP)

Indias external debt (as %of GDP) 17.3%

Ch i C iti f I di


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Changing Composition ofIndiasExternal Debt


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Creditor Classification of ExternalDebt


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Currency Composition


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Composition of Short-Term Debt(at end-March 2011)


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Principal Repayment and InterestPayment (US$ billion)


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IndiaState wise Loan

0.05 5000.05 10000.05 15000.05 20000.05

SIKKIM

MEGHALAYA

TRIPURA

MIZORAM

ASSAM

JAMMU AND

GOA

HIMACHAL

UTTARAKHAND

JHARKHAND

GUJARAT

PUNJAB

CHHATTISGARH

ORISSA

WEST BENGAL

HARYANA

RAJASTHAN

KERALA

UTTAR PRADESH

BIHAR

MAHARASHTRA

MADHYA PRADESH

KARNATAKATAMILNADU

ANDHRA PRADESH

Millions

Loan (in INR Millions)


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IndiaState wise GDP

0 20000 40000 60000 80000 100000 120000 140000 160000 180000 200000Lakshadweep

Dadra and Nagar HaveliAndaman and Nicobar Islands

Arunachal PradeshManipurMeghalaya

ChandigarhJammu & Kashmir

UttarakhandJharkhand

OrissaPunjab

Madhya PradeshKerala

KarnatakaGujarat

Andhra PradeshMaharashtra

GDP(in USD Millions)


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Countries Comparison

ByRajsekhar


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External debt management

T fift d l i d bt


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Top fifteen developing debtorcountries

C i f t l d bt


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Comparison of external debtpositions among BRIC countries

C i t l d bt iti


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Comparing external debt positionwith developed countries


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External debt to GDP ratio ofdeveloping & developed countries

BRIC Countries

Brazil 15

Russia 33

india 15

China 7

Developed Countries

USA 100

UK 400

Germany 142

According to the IMF Macro economist prudential

norms -40% for developing countries and 60% fordeveloped countries are the benchmark. This limitdelineates the point at which fiscal solvency is called

into question


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Impact of higher external debt

Higher debt raises the probability of defaulting.

When lenders stop lending, consumption andinvestment fall. If the downturn is bad enough,defaults, deficient demand and high unemploymentmight be the grim result.

The higher the level of debt, the bigger the drop fora given size of shock to the economy. And thebigger the drop in aggregate activity, the higher theprobability that borrowers will not be able to makepayments on their non state-contingent debt. Inother words, higher debt raises real volatility,increases financial fragility and reducesaverage growth


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Impact of higher external debt

According to Economists of BIS

Every 10 percent of debt-to-GDP, output declines0.17 percent to 0.18 percent. Put another way, ifdebt-to-GDP is currently at 100 percent, thatmeans GDP is 1.8 percent lower than it otherwisewould be.


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RBI Steps on Debt

BySoumitraMukherjee


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repayment of public debt,controlling the amount of borrowings and

productive use of borrowed funds

(Historical methods of reducing Debt/GDP ratioare through economic growth, fiscaladjustment/austerity, restructuring, financial

repression and steady inflation.)

Debt Management involves


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Detailed steps

Reduction in Primary Deficit

a) Containing the Debt Ratio (Total Debt/Total Assets)b) Contain revenue expenditures within the revenues raised

by the Government so that Government's net borrowing isused only for productive purposes

Reduction in Growth of current expenditure1. Reduction in the government's consumption expenditure

for its staff (controlled Govt. hiring, use of technology etc)2. Liquidation of Public Debt (Financial Repression)3. Reduction in capital Assistance and subsidies to public

enterprise (decontrol of Petrol & Urea prices, Diesel price-

hike and the pending sugar price decontrol)(http://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.html)
http://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.htmlhttp://www.moneycontrol.com/news/brokerage-recos-sector-report/urea-decontrol-positive-for-chambal-fert-tata-chem_580929.html


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Raising efficiency of borrowing Prog. of CentralGovt.

a) The Central Government and the Reserve Bank

signed an agreement on Ways and Means in March1997, which discontinued the practice of issuing adhoc Treasury Bills to replenish the Centres cashbalance with effect from April 1, 1997.

b) RBI takes into account the cash needs of the

government, the liquidity conditions in the marketand primary and secondary market yields.

Reforms in Debt Management of States

a) sale of state government loans (security instrumentsto raise debts) continue to be on old pattern

b) it is necessary to bring flexibility in the borrowingprograms of the state governments with the help ofRBI initiatives.

F i i i i l i d


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Foreign institutional investors andPublic debt

Foreign Institutional Investors have been permitted to

invest only in dated government securities.It must be noted however that Indias policy has been tokeep the External Debt as low as possible (about 17-20% of the total debt)http://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.html

Improving the state of debt marketThe RBI has taken various measures to widen anddeepen the debt market in India. These measuresinclude uniform price auction of 91 days treasury bills,undertaking repos in non-government debt instruments,sale of capital index bonds, etc.

Di i t t P li
http://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://kalyan-city.blogspot.com/2010/11/what-is-capital-meaning-features-and.htmlhttp://kalyan-city.blogspot.com/2010/11/what-is-capital-meaning-features-and.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.htmlhttp://www.moneycontrol.com/news/cnbc-tv18-comments/fm-eases-fii-investment-normslong-term-infra-corp-bonds_585343.html


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Disinvestment PolicyThe government should disinvest public sector units,especially, the non-strategic and sick ones. This will

enable the government to raise funds, which can beutilized to repay a part of the public debt. (Disinvestmentproceeds for 2010-2011 (stands at Rs2,59,010 millionof which Coal India accounts for Rs1,51,990 million.This without including the proceeds from telecom

spectrum sales which brought another 80-90 thousandcrores into the state coffer).

Proper Monitoring of ExpenditureThe Government should make effort, to monitor the useof funds. The wastage of funds should be monitored byGovernment Authorities.


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Debt Management Office (DMO)

Necessity of an independent DMO In emergingmarkets like India, it would help establish focus,clarity and transparency.

Conflict of interest if RBI handles Debt Management.

Role of the proposed independent DMO


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Internal Debt ManagementManaging the public debt of Government of India/State Governments , regulating & supervising the

Primary Dealers System and developing theGovernment Securities Market involve:

Floatation of Central/State Government Loans;

Fixing of limits on Ways and Means advances (WMA) for both

Central and State Governments and monitoring the use ofthese limits on a daily basis;

Authorisation, regulation and supervision of the PrimaryDealer system;

Market development activities like the introduction of new

instruments, development of trading platform, clearing andsettlement systems and widening of investor base;

Facilitating State Governments' investment of their surpluscash balances in Treasury Bills and dated securities undervarious funds.


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External Debt Management External Debt is a dangerous double-edged tool that

can have disastrous effects, as is turning out to bethe case with most European countries. But at thesame time, countries like Korea and UK are usingexternal debt to good debt in spite of high Debt:GDPratios.(In fact Debt-Servicing ratio has emerged as a

more reliable index of the state of debt of a country.)

It has been the commendable hawkish stance of theGovt. and RBI that has helped India avoid the anysuch threat owing to its conservative strategyregarding external debt, with the exception of theGulf Crisis of 1991-92. Ever since, the RBI hasensured that external debt has been kept around the20% mark while ensuring low debt-servicing costs.


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US Debt Crisis & Impact

ByRahulSharma

US Debt Crisis


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US Debt Crisis

The US had its debt downgraded by the ratings agency Standard &Poor's last month after narrowly averting a debt default. The debtproblem has not gone away, though, and total US debt is expected toovertake GDP, the total amount of goods and services produced inthe country, this year.

US Debt Crisis


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US Debt Crisis

The federal government is estimated to have spent about $1.6tn(988bn) on its response to the financial crisis, which put a big dentin the public finances. The crisis also meant that the governmentreceived less in taxes from companies and individuals hit by thedownturn.

US Debt Crisis


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US Debt Crisis

Fighting wars in Iraq and Afghanistan has been another big cost forthe public finances in the past 10 years, estimated to have costabout $1.25tn so far. Some people also blame President Bush's taxcuts for the level of debt that the US government now finds itselfdealing with.

US Debt Crisis


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US Debt Crisis

Among the most serious problems since the financial crisis hasbeen rising unemployment, which increases the amount thegovernment has to pay in benefits as well as reducing the tax take.Most disturbingly, there has been zero net job creation in the USsince 2000.

US Debt Crisis


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US Debt Crisis

More than half of the annual budget is mandatory spending, whichwould be difficult to cut. Of the discretionary spending, more thanhalf goes on security, which is also hard to reduce. Without taxrises or major economic growth, it would be hard to cut enough toget rid of the deficit.


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Indian Stake - 41Billion USD only US downgrade not unexpected Montek Singh Ahluwalia

US downgrade raises concern over continuing turmoil

Investors may re-allocate portfolios due to tension

India not insulated, but exposure is limited

RBI watchful about the impact; Will ensure required steps

IT companies most affected due to large exposure

Incremental demand in banking & IT to reduce

India consumption driven; Hence, no major threat

Limited exports from India

Imports majorly from middle-east & south-east Asia


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FMs opinion on US debt


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debt management final

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