India’s external debt rose 23% to $155 billion in 2006-07 as Indian companies raised more foreign debt and a weakening dollar made loans from non-US sources more expensive.
As much as 56% of the increase is accounted for by commercial borrowings,
Making a point: Finance minister P. Chidambaram has said that despite the rise in external debt, the ratio of foreign debt to national income in India is among the lowest in the world.
and another 10% by a valuation change forced by the weakening US dollar, according to the annual status report on external debt released by the finance ministry. On 31 March 2006, total external debt stood at $126.4 billion, out of which commercial borrowings were only 21.2%, or $26.87 billion.
The finance ministry report said more than half of the increase in India’s foreign debt came from borrowing by companies, which look to overseas sources for lower interest rates. Indian companies have also been tapping overseas sources to fund their foreign acquisitions.
Finance minister P. Chidambaram said that despite the increase, the ratio of foreign debt to national income in India was one of the lowest among major economies of the world. The ratio of interest charges and loan repayments to export earnings—a measure of a country’s ability to service debt—showed ”a perceptible improvement,” declining to 4.8% last year from 9.9% a year ago, the report said. And the country’s foreign exchange reserves are now 129% of total debt.
More importantly, short term borrowing grew at a slower pace, up 12% from a year ago, and account for just 7.7% of total debt.
A low share of short term debt means the country is less vulnerable to flight of capital.
Measured in rupees, the external debt on 31, March 2007 came to Rs6.76 trillion, a 19.8% rise over Rs5.64 trillion a year ago.
Saumitra Chaudhuri, economic adviser with domestic credit rating agency Icra, said: “The recent restrictions would make sure that external commercial borrowings would cease to be a viable option for issuers who wish to substitute rupee debt for cheaper overseas resources.”
The global climate is also getting more risk-averse, added Chaudhuri. However, according to him, external debt will continue to rise: In 2007-08, total external commercial borrowings are estimated at $20 billion, compared to $16 billion last fiscal, “because there would still be significant demand on account of financing needs for import of equipment and materials and also for acquiring overseas assets.” About 16% of the external debt is held with non-resident Indians as deposits, 12% as short-term debt and 11% as multilateral debt. Sovereign debt at $48.6 billion is 31.4% of total external debt and 5.4% of gross domestic product.
AP contributed to this story.