SECTION I

INTRODUCTION

The Indian economy has undergone significant structural transformation in its external sector since the initiation of all-round reform process in July 1991. The financial turmoil experienced by many countries during the nineties has underscored the cautious and well-phased approach towards the capital account liberalisation in India. The external sector policies of India during the nineties have, inter alia, been marked by the process of liberalisation of trade, market determination of the exchange rate, opening up of the foreign investment, and sustainability of the external debt. In this context, a periodic assessment of the country’s external liabilities and assets is necessary in order to visualise the impact of the policy changes on the magnitude and composition of capital flows. It may be pertinent to note here that one of the main reasons for the recent Asian crisis was the lack of transparency in assessment and dissemination of cross border flows. To mitigate such lacunae, many countries have been assessing periodically their foreign liabilities and assets as a backbone measure for their external sector policy formulations in order to smoothen the capital flows. In India, the Reserve Bank of India (RBI) has been carrying out such periodical assessments quinquennialy since 1987, on the basis of "Census of India’s Foreign Liabilities and Assets". During the intervening period, surveys of India’s foreign liabilities are conducted. However, data on foreign assets of the corporate and banking sectors are not captured in the annual surveys. The previous assessment of India’s foreign liabilities and assets on census basis was undertaken with March 31, 1992 as the reference date. The present census is the third in the series. It may be mentioned here that India’s first census was conducted at end-June 1948 as the reference date.

This article has been prepared on the basis of the results derived from the present census data. It is divided in to six sections. Section I deals with introduction. Overall foreign liabilities and assets of India are dealt with in Section II. Foreign liabilities and assets of various sectors of the economy covered in the census are discussed in Sections III to VI. While Section III deals with foreign liabilities and assets of the official sector, discussion on corporate sector is set out in Section IV which, inter alia, deals with direct investment, portfolio investment, creditor liabilities and other liabilities including short term liabilities. It also contains details of various types of foreign assets of the corporate sector such as investment abroad, outstanding deferred export credit, unrealised export credit and balances held abroad. Whereas Section V is devoted to the analysis of foreign liabilities and assets of the banking sector, Section VI covers the insurance sector’s liabilities and assets.

As the census covered various economic units such as public and private limited companies including Public Sector Undertakings (PSUs), banks, insurance companies, financial institutions, etc., different types of schedules were used to collect data from various institutions. The details of the schedules used in the census are given in Annexure I. Constituents of India’s foreign liabilities and assets used in this article are listed in Annexure II. Important terms are described in Annexure III and sectoral and industrial classifications adopted in the census are given in Annexure IV.

The census has focused attention on different segments of economic units such as Government of India, Reserve Bank, joint stock companies including Government companies, insurance companies, Indian banks, branches of foreign banks operating in India and other financial institutions such as Unit Trust of India, EXIM Bank, etc. As in the previous census, individuals, partnership concerns and unincorporated entities in the private sector are excluded from the scope of the census. Though, it may be true that in recent years a number of partnership concerns have been established with non-resident participation, by and large, most of the investment in these partnership concerns have been made on non-repatriation basis. Further, in the case of individuals and partnership firms, preparation of the frame is almost a herculean task in view of the magnitude of the problems of identifying such units. It was, therefore, decided to exclude unincorporated units from the purview of the census.

March 31, 1997 was taken as the reference date for the census as most of the companies have their account closing on that date. Therefore, all the economic units were requested to furnish the relevant data for two years ending March 31, 1996 and 1997. However, if the account closing date is other than March 31, and information relating to a few items such as free reserves and surplus, total assets, etc., is not readily available on the reference date, the units were requested to furnish the relevant details on the account closing date prior to March 31, 1996 and 1997, respectively. But majority of the companies in the corporate sector have furnished the relevant information as on March 31, 1996 and 1997.

There was no difficulty in identifying various economic units having foreign assets and liabilities to be covered under the census except those belonging to the corporate sector. To prepare the frame for the corporate sector, an exhaustive list of companies to be covered under schedule 1 was prepared on the basis of the following sources.

In order to facilitate the units, covered in the census, to provide audited annual balance sheets pertaining to the reference date, the census was launched in December 1997.

Letters were addressed to 10,395 corporate units in addition to 104 banking units, 6 insurance units and 74 official sector units with a request to furnish requisite information. Efforts were made to elicit maximum response from the respondents, which also included, among other things, close monitoring of receipt of data from core units, effective interface with the concerned officials in the corporate and banking units and also protracted correspondence. In the absence of availability of definite information regarding foreign assets and liabilities of corporate units, large corporate units with equity capital of Rs.50 lakhs and above were included in the frame, so also the export house members. Most of them might not be having foreign liabilities and assets. As a result, 3,182 units have responded with either filled-in or blank schedules. FDI flow data obtained from Exchange Control Department (ECD) of the RBI are added to the stock in respect of those companies, which did not respond to our request, to refine the coverage of data. Further, in respect of a few non-responding large companies, information available in the past records was substituted.

Smooth flow of data regarding foreign liabilities and assets of the country could alone lead the policy makers to arrive at a judicious perception which would induce investor friendly and industry friendly policy formulations for the betterment of the country. However, going by the past experience, the response from the corporate units was not encouraging and as a result, available data from internal sources were included to arrive at the foreign liabilities and assets of the corporate sector which may not necessarily be a better option. Further, India has committed to subscribe to the International Investment Position (IIP) as per Special Data Dissemination Standard (SDDS) of the IMF from the quarter ending December 31, 2001. Overwhelming response from the corporate sector could alone improve the compilation of IIP of the country on the lines of the IMF prescriptions which will fulfill our obligation to the IMF and also go a long way for better policy formulation in the globalised environment.

The data used in this article are basically from the duly filled-in schedules received from various institutions in the official and non-official sectors (Annexure I). Data from certain official publications, particularly pertaining to official sector, were also used to make the coverage as complete as possible. In the case of Government of India, as most of the liabilities are in the form of loans arranged through the Ministry of Finance, the required data were taken from the publications of the Ministry of Finance viz., External Assistance, and India’s External Debt - A Status Report. Various other details relating to banking sector, such as non-resident rupee accounts maintained with the RBI, were available in the Reserve Bank’s internal records which were used extensively to work out the levels of foreign liabilities and assets of the banking sector. Similarly, certain details were taken from the data submitted by the banks to the RBI through periodical returns. These included, inter alia, balances in Nostro and Vostro accounts. Simultaneously, adequate care was taken to ensure that there was no double counting with regard to various items.

The census has captured data on short term liabilities and assets of the corporate sector to the extent reported by the responding companies. Short term liability relating to nonresident deposits of less than one year maturity is included in the various NRI deposits of the banking sector and are excluded from the short term liabilities of the corporate sector. The growth rate for the period 1992-97, is annual compound growth rate.

The face values of shares, debentures, deposits, etc., arising out of foreign investment by the non residents were collected in rupee terms from the responding units. The proportionate share of free reserves and surplus ascribable to non-residents, on the basis of percentage of equity held by them on the reference date, was added to the face value.

In the case of foreign liabilities and assets denominated in foreign currencies, such as liabilities to IMF, foreign currency loans of the corporate sector, foreign assets of the corporate sector, foreign exchange reserves, etc., relevant data were originally collected in the respective foreign currencies. Rupee equivalents were calculated using market exchange rates prevailing on the date of reference. Further, on account of the adoption of market exchange rates for the purpose of valuation, data appearing in this article may not agree with the relevant data published elsewhere. Due to rounding off to the final digit, there may be a slight discrepancy between the sum of the constituent items and the total in some tables.

The year 1996-97 was marked by improvements in several spheres of economic activity including the external sector. Distinct signs of stability were witnessed in the foreign exchange market. Initiation of various measures to liberalise the capital account, structural shift in merchandise trade that attracted large capital inflows, coupled with reduction in current account deficit accentuated the accumulation of foreign exchange reserves.

India’s gross foreign liabilities, inclusive of non-civilian debt, as on March 31, 1997 stood at Rs.4,14,400 crore or US $ 1,15,448 million as compared to the level of Rs.3,83,412 crore (US $ 111,619 million) recorded as on March 31, 1996. As on March 31, 1992, these liabilities amounted to Rs.2,66,064 crore (US $ 85,206 million). Thus, during 1992-97, the foreign liabilities increased by 9.3 per cent in rupee terms and 6.3 per cent in dollar terms¹ . The major constituents which contributed for substantial growth in foreign liabilities during 1992-97 were outstanding loans from international institutions (increased by Rs.31,037 crore or 8.3 per cent), foreign direct investment ( by Rs.32,670 crore or 56.9 per cent), portfolio investments (by Rs.44,136 crore or 98.4 per cent), and ECBs (by Rs.25,054 crore or 8.7 per cent). During 1996-97 the foreign liabilities rose by 8.1 per cent in rupee terms. In dollar terms, however, they rose by 3.4 per cent. The higher growth in rupee terms reflected depreciation of rupee against US dollar.

In contrast to this, the gross foreign assets of the country increased substantially during 1992-97 and were placed at Rs.1,38,217 crore or US $ 38,506 million as on March 31, 1997, registering an increase of Rs.95,243 crore (26.3 per cent). In dollar terms, they increased by US $ 24,744 million (22.8 per cent) during the period. The major constituents which contributed to the rise in foreign assets during 1992-97 were foreign exchange reserves by Rs.71,082 crore (31.8 per cent), subscription to international institutions by Rs.3,566 crore (18.0 per cent), banking sector balances held abroad by Rs.9,914 crore (27.0 per cent), investments abroad by banking sector by Rs.2,042 crore (76.4 per cent) and investment abroad by corporate sector by Rs.1,447 crore (23.6 per cent). During 1996-97, foreign assets of the country increased by 29.3 per cent in rupee terms and 23.7 per cent in dollar terms which was mainly on account of increase in foreign exchange reserves and investments abroad by banking sector.

The net foreign liabilities of the country, as on March 31 1997, stood at Rs.2,76,183 crore (US $ 76,942 million), as against Rs.2,76,489 crore (US $ 80,492 million) as on March 31, 1996. The marginal decline in net liabilities during 1996-97 (0.1 per cent) was due to substantial increase in foreign assets and moderate rise in foreign liabilities. As on March 31, 1992, net liabilities of the country amounted to Rs.2,23,090 crore or US $71,444 million. In US dollar terms, the net liabilities of the country recorded a decline of 4.4 per cent during 1996-97 as against an increase of 1.5 per cent per annum during 1992-97 (Table 2.1).

The share of the official sector in the total foreign liabilities as on March 31, 1992 at 56.5 per cent, declined significantly to 43.9 per cent as on March 31, 1997. As against this, the share of liabilities of the non-official sector increased from 43.5 per cent to 56.1 per cent during the same period. While the share of the foreign assets of the official sector increased from 66.6 per cent to 74.2 per cent during 1992-97, that of the non-official sector declined from 33.4 per cent to 25.8 per cent during the period (Table 2.1).

Official sector comprises Government of India (GoI) and the Reserve Bank. The data on liabilities and assets of the official sector were compiled from the information available in the published sources and supplemented by the data furnished by the respective Departments of the Reserve Bank of India. As stated under the valuation procedure, data appearing in the official sector, however, may differ from the data published elsewhere on account of adoption of market exchange rate as on the reference date. As on March 31, 1997, foreign liabilities of the official sector inclusive of non-civilian debt declined by 1.8 per cent to Rs. 1,81,789 crore, as compared to Rs.1,85,195 crore a year ago. In US dollar terms, the foreign liabilities of the official sector declined by 6.1 per cent during the year. The substantial decline of foreign liabilities in US dollar terms during 1996-97 was on account of depreciation of Indian rupee against US dollar (4.5 per cent). During 1992-97, the liabilities of the official sector increased by 3.9 per cent in rupee terms on account of increase in outstanding loans from foreign governments as well as international institutions. In dollar terms, however, the increase was only 1.0 per cent (Table 3.1).

Foreign assets of the official sector at Rs.28,631 crore as on March 31, 1992 increased by 29.1 per cent to Rs.1,02,530 crore as on March 31, 1997, mainly on account of increase in foreign exchange reserves by 31.8 per cent during the period, balance held abroad by 22.3 per cent and also subscription to international institutions by 18.0 per cent. During 1996-97, the foreign assets increased steeply by 25.2 per cent which is mainly due to increase of foreign exchange reserves by 27.6 per cent. As a result, the net foreign liabilities of the official sector declined substantially by 23.3 per cent to Rs.79,259 crore as on March 31, 1997 as compared to Rs.1,03,317 crore as on March 31, 1996. During 1992-97 the net liabilities of the official sector declined by 8.2 per cent.

The foreign liabilities of the official sector at end-March 1997 comprised outstanding loans from international institutions (52.2 per cent), outstanding loans from foreign governments (43.6 per cent), liabilities to the IMF (2.6 per cent), and other liabilities (1.6 per cent). While borrowings from foreign governments declined by 6.2 per cent to Rs.79,330 crore during 1996-97, outstanding loans from international institutions increased by 6.0 per cent to Rs.94,824 crore. The Government of India did not avail of any fresh loan from the IMF other than those availed during 1991-92 and repaid the loans as per the schedule drawn by the Fund. As a result, the liabilities to the IMF declined gradually from Rs.10,776 crore at end-March, 1992 to Rs.8,152 crore at end-March 1996 and further to Rs.4714 crore at end March, 1997 (Table 3.1).

The World Bank Group, which mainly consists of IBRD and IDA was the largest lender to India. The share of the Group in total liabilities of the official sector has been continuously dropping from 83.5 per cent as at the end of March 1986 to 67.7 per cent as at the end of March 1991 and further to 58.0 per cent as on March 31, 1997. IDA is the lending window of the World Bank Group on soft terms which lend to its poor member countries whose per capita income is less (US $ 925 at 1996 prices). India’s outstanding loans from the IDA at Rs.62,343 crore as on March 31, 1997 constituted 41.7 per cent and those from IBRD at Rs.24,354 crore formed 16.3 per cent of the total liabilities of the official sector. As on March 31, 1992, the shares of these institutions were at 36.5 per cent and 19.3 per cent, respectively (Table 3.2).

Among the bilateral lenders, Japan was the largest lender to the Government of India, accounting for 15.4 per cent of total loan liabilities of the official sector. Japan’s assistance of significant magnitude to developing countries including India, has been in tune with its policy to lend more in the form of Official Development Assistance (ODA) to other countries. Germany was the second largest lender at 7.6 per cent followed by the USA at 4.4 per cent of the total official loan liabilities as on March 31, 1997. France, Netherlands, Russia and Canada were the other countries which lent considerably to the Government of India (Table 3.2).

During 1996-97, the amount of utilisation of loans from foreign governments and international institutions aggregated to Rs.8,966 crore and the repayment of loans was at Rs.6,547 crore. As a result, net utilisation of loans was lower at Rs.2,419 crore during 1996-97. The repayment of IBRD loans was higher by Rs.968 crore compared to the utilisation during this year (Table 3.3).

In the total lending to India by the World Bank Group, IDA’s lending constituted 71.9 per cent as on March 31, 1997 and the remaining from IBRD. The share of the IBRD decreased from 34.6 per cent to 28.1 per cent during 1992-97, correspondingly the share of IDA rose from 65.4 per cent to 71.9 per cent during the same period (Table 3.4).

The net utilisation of loans availed from IBRD and IDA declined steeply from Rs.2,190 crore during 1990-91 to Rs.440 crore during 1995-96, which increased to Rs.1,578 crore during 1996-97 (Table 3.5). Substantial decline in net utilisation during 1995-96 was on account of larger repayment of IBRD loans.

Foreign exchange reserves formed the largest component of foreign assets of the official sector, which stood at Rs.94,932 crore, as on March 31, 1997 as compared to Rs.74,384 crore as on March 31, 1996. It rose substantially by 31.8 per cent during 1992-97. During 1996-97, it rose by 27.6 per cent mainly due to accretion of foreign currency assets, despite large payments on account of redemption of India Development Bonds and net outflow under FCNR (A) scheme. The foreign exchange reserves accounted for the lion’s share of the total assets of the official sector, which increased from 83.3 per cent at end-March 1992 to 92.6 per cent as on the reference date.

As on the reference date, subscription to international institutions, aggregated to Rs.6,345 crore, recording an increase of 1.7 per cent during 1996-97. Loans to foreign governments increased by 3.2 per cent to Rs.545 crore during 1996-97. However, balances held abroad declined by 4.6 per cent to Rs.397 crore as on March 31, 1997 (Table 3.1).

The share of loans and advances to foreign governments in the total assets declined from 5.4 per cent at end-March 1992 to merely 0.5 per cent at end-March 1997. India has extended loans to many developing countries, particularly to African countries. The outstanding loans availed by Vietnam accounted for 31.9 per cent of the total loans and advances extended by India, closely followed by Bhutan (23.5 per cent) and Nepal (8.3 per cent). Kazakhstan (3.9 per cent), Uganda (3.7 per cent), Bangladesh (3.5 per cent), Mauritius (3.5 per cent), etc., were other important countries which availed loans and advances from India (Table 3.6).

1 Growth rates for 1992-97 are annual compound growth rates.