exports and imports and often with RBI as the counter-party.<sup>28</sup> While these numbers are low in comparison with East Asia and China, this has to be looked at in the context of public sector debt that is over 90 percent of GDP in an environment of worsening government debt dynamics.

Pension liabilities have been growing rapidly both at the center and states. At the center, pension spending for civil servants grew by more than 20 percent per year during the 1990s, and has now reached 1 percent of GDP. The situation is even more difficult at the state level. For example, in Uttar Pradesh<sup>29</sup> , the ratio of pension spending to state GDP increased from 0.4 percent to 1.2 percent during the 1990s. The _White Paper on Tamilnadu Government’s Finances_ issued in 2001 (pages 19-20) notes that pension commitments “have been growing at an incredible rate of 30 percent per annum on an average during the last five years and constitute the fastest growing component of the total revenue expenditure of the State Government”. Pensions as a percentage of revenue expenditure grew from 5 percent in 1991/92 to 13 percent in 2000/01. Pension expenditures at the central and state levels are likely to keep on growing at a fast pace, especially at the state level where employment more than doubled over the past 30 years. Preliminary estimates conducted in 2001 using the World Bank PROST actuarial model suggest that the present value of central and state pension liabilities could amount to 25 percent of GDP.<sup>30</sup>

# **3. Crisis Proofing**

In spite of the rise in the level of government debt and the deterioration in its dynamics, India is not on the verge of a macroeconomic crisis such as that endured recently by Russia, Turkey and Argentina, which apparently exhibited better fiscal fundamentals on the eve of their crises than India has over the past few years.<sup>31</sup> There are several reasons for this. First, there is only limited capital account convertibility. Second, cross-country comparisons are complicated by differences in the currency composition of debt, its maturity, whether or not the real exchange rate is in equilibrium and the size of contingent liabilities and potential balance sheet currency/maturity mismatches in the banking and corporate sectors. In India, there has been a shift towards long-term rupee debt in financing the fiscal deficit after 1991, while strictures on external borrowing by corporates and banks automatically lower the potential for currency mismatches. Third, in contrast to the recent crisis countries, India has an impeccable credit history (no defaults, no debt restructurings) and a track record of low inflation and high macroeconomic stability, which permits it to issue long-term debt denominated in its own currency, an option unavailable to countries such as Russia, Turkey and Argentina.<sup>32</sup> Fourth, countries with unsustainable public debt dynamics which eventually experienced crisis, such as Russia and Argentina, simultaneously had low international liquidity. This combination proved intractable, even with substantial bailout packages. In contrast, India’s international liquidity has improved substantially after 1991 as noted above.

After the crisis, there was a conscious decision to build up reserves to “provide greater insurance against external sector stresses and uncertainties”.<sup>33</sup> Acharya (2001, page 17) notes that “the capital account surplus reached its peak in 1993/94 (at 3.5 percent of GDP) and has been well below that level in subsequent years. Nevertheless, except for 1995/96, the capital account has been large enough in relation to the corresponding current account deficit in each of the last ten years (i.e., 1991/92-2000/01), to ensure accretion to foreign exchange reserves.”

> 28 While not a serious issue at present, this could potentially encumber RBI reserves and bears monitoring. 29 See Zahir (2002)

> 30 A detailed analysis of the pension liability is beyond the scope of this paper, although we flag it as an important unfunded liability.  See also World Bank (2003a).

> 31 For the comparison of fundamentals, see IMF (2002), chapter III, page 37, and Ahluwalia (2002a).

> 32 These factors, together with the degree of dollarization have been stressed as critical factors in determining default risk in Rogoff, Reinhart and Savastano (2003).

> 33 Acharya (2001), page 16.

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