New Delhi: India’s short-term debt to total external debt ratio rose to 21.2% in 2010-11, the highest in at least five years, signalling a worsening of the external economy of the country.
The status report on external debt released by the finance ministry for 2010-11 also showed that the short-term debt to foreign exchange reserves increased to 21.3%. The rise in short-term debt is considered riskier as it needs to be repaid from foreign currency reserves in a shorter duration of time. However, the external debt to gross domestic product (GDP) ratio fell to 17.3% in 2010-11 compared with 18% a year ago.
Though the external economic scenario of the country has improved, the composition of external debt is worrying, said credit rating agency Crisil Ltd chief economist D.K. Joshi.
“The increase in short-term debt to total external debt is not a welcome development because short-term external debt is considered riskier than long-term external debt,” he said. However, Joshi contended that India’s external debt is not yet in the danger zone. “It is like your cholesterol level is rising, but we do not know whether there will be a heart attack or not,” he said.
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Data on short-term debt includes trade credit up to 180 days and above 180 days and up to one year, foreign institutional investor (FII) investment in government treasury bills and corporate securities, investments by foreign central banks and international institutions in treasury bills and external debt liabilities of foreign central banks and commercial banks. At the end of March, India’s short-term debt was $65 billion, reflecting an increase of 24.2% over end-March 2010.
The finance ministry said India’s external debt has remained within manageable limits despite the increase in absolute terms and the changing composition. “The external debt to GDP ratio was 38.7% in 1991-92 and 22.5% in 2000-01,” the finance ministry said in a release accompanying the report.
At the end of March, India’s total external debt stood at $305.9 billion, increasing by $44.9 billion (17.2%) over the end-March 2010 level of $261 billion.
“The increase in external debt was mainly due to higher commercial borrowings and short-term trade credits, which is in line with high growth of the economy and strong domestic demand in 2010-11,” the finance ministry said.
“The steady improvement in India’s external indebtedness position has been due to the prudent external debt management policy followed by the government of India, the main planks of which are monitoring long and short-term debt, raising sovereign loans on concessional terms with longer maturities and regulating external commercial borrowings,” it said.
The share of commercial borrowing in total external debt has increased from 19.7% at the end of March 2005 to 28.9% at end-March 2011. The changing composition of debt in favour of commercial borrowing, however, is also an indication of a maturing market economy and the increasing role that the corporate sector is playing in sustaining the high growth rate, the finance ministry said.
The ministry said India’s debt indicators compare well with other indebted developing countries. According to the World Bank’s latest Global Development Finance report, which contains external debt numbers for 2009, India’s position was fifth, after China, Russia, Brazil and Turkey, in terms of absolute debt stock among the top 20 developing debtor countries, the finance ministry said. In terms of ratio of external debt to gross national income, India’s position was the fifth lowest.
Graphic by Sandeep Bhatnagar/Mint