us $ 306 billion by march 2011. however, the ratio of india ’ s external debt to gdp has declined over the years from 28. 7 per cent in 1990 – 91 to 17. 3 per cent in 2010 – 11. the debt service ratio declined from 35. 3 per cent to 4. 2 per cent during the same period4. as regards the composition of external debt, there was a distinct decline in the share of government debt from 42. 7 per cent of total external debt in march 2001 to 24. 2 per cent by march 2011 with corresponding increase in private debt ( charts 7 & 8 ). debt service ratio, as measured by the proportion of total debt service payments to current receipts of balance of payments ( bop ), is an indicator of debt sustainability. bis central bankers ’ speeches although, india ’ s external debt service position has improved, recently in the wake of moderation in inflows amidst destabilized euro area financial turmoil some of our external vulnerability indicators have worsened. for example, reserves cover of total debt has fallen below 100 per cent ( table 5 ). table 5 : external sector vulnerability indicators ( per cent ) * annualised conclusions what key conclusions can we draw from a review of capital flows and our bop developments over the past two decades since the crisis of 1991? first, global capital flows now increasingly show a two - way movement between edes and advanced economies. however, edes remain vulnerable to volatility and sudden stops in capital flows. this is because edes have limitation in borrowing in their own currencies in international capital markets, a phenomenon known as “ original sin ”. this is evident from the recent crisis. the epicenter of 2008 crisis was the us but capital flows to edes, including bis central bankers ’ speeches india, was severely affected. now the epicenter has shifted to europe but capital flows to edes continues to be impaired. second, considerable lessons seem to have been learnt by edes from their past experience debt and currency crises, particularly from the latin american debt crisis of the 1980s and the east asian currency crisis of 1997. this has reinforced the hierarchy of capital flows with a preference by edes for equity flows. this is also reflected in a discernible shift in the composition of capital flows to edes in favour of equity, particularly fdi. third, capital flows to edes depend on push factors emanating from low interest rate and lack of investment opportunity in advanced economies as well as by pull

fundamentals and improved external liabilities position brought to the fore various questions on capital controls again. capital flows have interfered with the simultaneous management of fixed / managed exchange rate peg and inflation targets – a phenomenon known as mundell ’ s “ impossible trinity ”. for edes with flexible exchange rates, volatility of the exchange rate and the loss of trade competitiveness prompts central banks to occasionally intervene in the foreign exchange market. this increases domestic liquidity with its inflationary consequences if left unsterilized. but sterilization has quasi - fiscal costs. against this backdrop, the issue of capital controls, especially the imposition of financial transactions tax, some form of tobin tax, is being widely debated among policy makers in multilateral forums like the g - 20, and the imf as well as in academic circles. significantly, the bretton woods institutions have relaxed their earlier position on capital controls. the imf ’ s own independent evaluation office found that during the 1990s the fund clearly encouraged capital account liberalization in its bilateral policy advice to member countries. the fund ’ s multilateral surveillance also emphasized the benefits to developing countries of greater access to international capital flows. but following the 2008 crisis, in a policy note in february 2010 the imf noted “ circumstances in which capital controls can be a legitimate component of the policy response to surges in capital flows ”. the world bank also recognized that “ capital controls might need to be imposed as a last resort to help mitigate a financial crisis and stabilize macroeconomic developments ”. the g - 20 recognised in october 2011 that “ to maintain financial stability, capital controls may be adopted or reversed as destabilizing pressures abate ”. against this background, i now turn to evolution of our policy and experience with capital flows. capital account management in india india ’ s capital account liberalization began in a substantive sense in 1991 following a severe balance of payments ( bop ) crisis. the analytical foundations for reforms were provided by three reports : report of the high level committee on balance of payments ( chairman : c. rangarajan, 1991 ) and the two reports on capital account convertibility ( chairman : s. s. tarapore, 1997 and 2006 ). these reports, inter alia, suggested : ( i ) encouragement to private capital inflows ; ( ii ) shift from debt creating to non - debt creating flows, ( iii ) a shift within the debt inflows from short - term to long - term debt, (