Indian Economy | External Debt of India Download PDF
The external debt comprises of all foreign currency denominated debt owed by the central and state governments, Indian companies and the Indian residents. As economies follow open policies, external debt becomes an important parameter to track down given their sensitivity and ability to service them, as in the absence of their servicing, would imply more foreign currency borrowings for servicing the debt.
India’s total debt stood at USD 390 billion as at the end of March 2013 comprising of 19 per cent of GDP and global rank of fourth highest amongst emerging economies by the IMF. An aspect which is true for any borrowings either as rupee denominated or as foreign currency denominated is that they are not bad or necessary evil. Borrowing is the basis of growth of businesses globally.
It is not the quantum of borrowings which is important but how they are being utilized or are they generating sufficient returns to pay the interest and earning sufficient to repay the principal. This is what is meant by ‘debt servicing’. As long as debt is ‘serviceable’ any amount of debt is ‘sustainable’. .
How do we measure external debt serviceability? This is measured through foreign currency received not as debt but through inflows on the ‘balance in current account’ of BOP. That is, through exports of goods and services and also other inflows such as inward remittances and inward tourism or inflows which are not debt creating or reversible in nature.
This is seen in relation to the debt liability in a year. Whatever the debt component, some amount as interest and also part payment of the principal would have to be paid every year. Suppose inflows on the current account are USD 100 million and outflows on account of interest liability is USD 20 million and if the loan is repayable in five years it will imply USD 20 million added to the interest then the debt to service ratio (DSR) is 40 per cent.
Can we say that the debt is serviceable? Experience of countries has shown that the outflows for servicing of debt should not be more than one-fourth that of inflows that is, the ratio should be under 25 per cent. India’s DSR has marginally increased from 4.6 per cent during 2008-2009 to 6.0 per cent in 2012-2013 but much below the international prescribed benchmark. That is, India’s debt is comfortably serviceable.
There are certain other comfortable features of the external debt situation which are as follows:
(1) Short-term debt (likely outflows in a year) to foreign exchange reserves and also total external debt is only 25 per cent.
(2) Total foreign exchange reserves are around 75 per cent of the total external debt.
(3) The composition of the debt has one-third as ECBs and trade-related (35 per cent), one-fifth as concessional and long-term bilateral and multilateral (20 per cent), NRI deposits (18 per cent) and short-term debt (25 per cent) and other debt (2 per cent). Thus, most of India’s external debt is commercial in nature or trade-related and not of the government but still included in external debt as the liability of the country as a whole.
India’s sovereign debt in foreign currency is only 20 per cent of its external debt. As part of GDP, it is still very low of under 5 per cent. This has to seen in the context of the growing sovereign debt of countries in the euro zone which is around 100 per cent of their GDP
The external debt situation in India is well under control and not a cause of concern as long as the ratios like DSR, short-term debt to total debt do not exhibit a continuous upward trend. These ratios are monitored on a quarterly basis by India. It may also be mentioned that for open economies two parameters are critical and requires close monitoring one the current account deficit and the other DSR. In all the SE Asian economies, Argentina and Chile crisis was triggered by high DSR levels and ballooning CAD. Argentina had a DSR of as high as 107 per cent.
The other issue of external debt lies in the strength of currencies. Stronger currencies can manage high levels of debt for example, the largest economy of the world which is the US has the highest level of external debt of USD 13 trillion almost over 90 per cent of its GDP. Same is true for other economies such as UK, Germany, France, Spain, etc.
Luxembourg has the highest per capita income but also has the highest per capita debt in the world. The rapidly changing global dynamics, fundamentals and emergence of Asia notably China, India and other Asian economies, will question the sustainability of such high levels of debt, by these countries, in the long run. It is not only questionable but also dangerous for the world economy. Already crisis like situations in countries such as Greece and Ireland have begun to surface.
Public Debt of India
While India can draw comfort levels in terms of external debt, India also has a deeper internal problem of the high levels of rupee denominated debt comprising of government borrowings, petro oil bonds, etc. This taken together with external debt is known as public debt’. Public debt to GDP ratio has continuously increased reaching almost 70 per cent.
A striking difference in the overall public debt of India in relation to other economies having similar magnitude of public debt is the fact that in India internal debt accounts for 90 per cent of public debt while external debt is only 10 per cent. In other similar economies, the component of external debt was of much higher levels making them more susceptible to crisis than India.
Though high internal debt is preferable to high external debt but not without its implications on domestic liquidity, inflation ultimately threatening long-term sustainability of growth. The government has made conscious efforts at fiscal consolidation but the crisis has taken its own toll in terms of fiscal concessions, increased levels of deficit to prevent the slowdown of growth. This may be understandable but the bigger challenge for the government would be to balance investment needs to increase growth rates and at the same time to keep deficits under check. This is easier said than done.