Home / Opinion / Online Views /  The perfect recipe for an external debt crisis

The new numbers on the balance of payments released by the Reserve Bank of India (RBI) on Thursday reveal the country’s unhealthy appetite for external debt.

According to RBI, India’s external debt stock at the end of March this year was $390.04 billion—an increase of $44.6 billion. In the normal course, for an economy of $1.8 trillion, this is well within the tolerance limits for now.

The operative phrase is ‘for now’.

For one, this debt stock is effectively an understatement. According to RBI, the valuation gain, arising due to the depreciation of the rupee and other currencies against the dollar, pared the value of the debt stock by $55.8 billion. In other words, the effective debt stock is the rupee equivalent of $400 billion.

Second, the servicing or payback of this external debt is not getting easier. Not only are exports failing to see a secular increase, the country’s growing appetite for imports (not just gold, but even consumer goods such as LED television sets) is feeding this phenomenon of a rising external debt burden.

Third, the maturity profile of the external debt is now at a worrying proportion. In terms of debt stock, short-term debt now accounts for a quarter—essentially, one in four dollars owed by the country are to be repaid in the short term.

It is more worrying if we look at the residual maturity—debt that has to be repaid in the next year, next two years and so on. In this fiscal, the country has to repay $172.35 billion—which is 44% of the country’s debt stock of $390.04 billion.

Taking into account these basic vital stats of India’s external debt, it is obvious that alarm bells should be ringing. Not just because of the worsening global economic outlook, but also due to the fact that the Indian economy is yet to work out a solution to its structural problems like the fiscal deficit, infrastructure deficit, skill deficit and so on. It is obvious that India is looking down the barrel of an external debt crisis. Think 1991.

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