India’s external debt increased 22.6% to a record $155 billion (more than Rs6.3 trillion) in the year ended March, driven primarily by the growth in external commercial borrowings (ECBs) and short-term debt.
But overall external debt measures, such as the debt service ratio, were positive, leaving the economy with room to consider increasing overseas borrowing to fund domestic investment, said some economists.
The debt service ratio, a measure of the inflows used to pay off debt, dropped to 4.8% in 2006-07 from 9.9% in the preceding year. “It (fall in the debt service ratio) represents undergearing of the Indian economy. We can borrow more,” said Rajiv Kumar, chief executive of the Indian Council for Research on International Economic Relations.
Kumar said foreign exchange receipts, through merchandise and service exports, were stable, and a fall in ratio suggested that India could increase overseas borrowing to finance investment plans.
“My overall sense is, on external debt, we are comfortable, but we can’t take chances,” said Samiran Chakraborthy, chief economist, ICICI Bank Ltd. A hike in borrowings has an impact on the Reserve Bank of India’s (RBI) monetary measures, calling for a careful approach to to level of borrowing, said Chakraborthy.
Among the changes in debt components, the largest hike came in ECBs, which are used by firms to raise overseas borrowings. The ECB level at the end of March was $42.78 billion, up 59.2%. ECBs were also the single largest component of external debt, replacing multilateral loans which were the largest source of external debt last year. “We are seeing the relative privatization of external debt,” said Kumar.
The details of the ECB data would need to be studied in detail to assess if the domestic borrowers had cushioned themselves against any currency mismatches, he added.
Short-term debt in 2006-07 touched $11.97 billion, up 37.2%. The rise reflected a surge in imports during the year as staggered payments for them up to a year show up in short-term debt stock.
The proportion of long-term debt (over one year’s duration) to total debt was 92.3% in 2006-07, a shade lower than the previous year’s 93.1%. In absolute terms, long-term debt stood at $143.06 billion, up 21.5%. “The proportion of long-term debt to total debt is an even more redeeming feature; it reinforces my argument for higher gearing,” said Kumar. He felt a small increase in the proportion of short-term debt was not significant enough to offset other improvement in indicators such as debt service ratio.
The foreign exchangereserves of $199.2 billion at the end of March were boosted by a combination of overseas borrowing, short-term credit and “valuation gains” of $10.9 billion. Valuation gains are an indication of the extent of growth in reserves on account of appreciation of major currencies such as the euro against the US dollar. RBI does not disclose the extent of holdings in different currencies.