Home / Economy / Mint Explainer: Does India have a dire external-debt situation?

Does India need to keep a vigil over its external debt? Can India see a Sri Lanka-type meltdown in the near future? How well is it placed to meet all its external-debt repayment obligations in the near term without burning a big hole in forex reserves and a run on the rupee? A debate over India’s external-debt repayment schedule has triggered a showdown between the Trinamool Congress (TMC) and the Bharatiya Janata Party (BJP) leaders.

On June 10, TMC MP Jawhar Sircar tweeted that India might be headed for a “Sri Lanka type Debt Trap" and presented some RBI data to substantiate his claim. Here’s what Sircar seemed to be suggesting—just as in case of Sri Lanka, a weakening currency would increase India's liabilities, leading to ratings downgrades and finally an economic meltdown. BJP spokespersons Sanju Verma and Amit Malviya hit back with their own analysis to prove that the opposition was being alarmist. So, what is the reality?

What are the political parties squabbling over?

Sircar highlighted that 43% of India’s external debt, more than $267 billion, is due for repayment in the next nine months, asserting it would deplete our foreign reserves substantially and weaken the rupee. Verma pointed out that India’s external debt was only 21% of the GDP. while Sri Lanka's was more than 63%. She said India had a mountain of forex reserves [about $588 billion] to meet external-debt obligations. Malviya added that less than 3% of this debt is of central government. Talking exclusively to Mint, Chief Economic Advisor (CEA) to the Government of India V. Anantha Nageswaran, explained: “Most of the external debt is trade financing, which normally gets rolled over, and some long-term loans. The extent of repayment obligation has been in the 35-45% range in the past. Only if in every case the lender refuses to roll over and insists on repayment, it can become an issue, which is very unlikely."

For the moment, it seems India's external debt is manageable and unlikely to spark off an economic upheaval.
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For the moment, it seems India's external debt is manageable and unlikely to spark off an economic upheaval.

What has been the ground reality?

Nageswaran, no doubt, makes sense. India’s short-term external-debt repayments (with residual maturity of one year) have largely been consistent over the years as the CEA points out. Many companies and businesses look to roll over their debt, including loans, to sustain operations, so long as their debt management is fundamentally sound. Much of the short-term debt has been easily replaceable in the global credit market given the liquidity gush by central banks at rock-bottom interest rates in recent years—first, after the global financial crisis, and then after the pandemic. In fact, in the US, benchmark interest rates had been below 1% for years before Fed began raising rates recently. Japan even had negative interest rates to spur demand. This clearly doesn’t make repaying debt a priority for businesses. And, then, of course, the Reserve Bank of India monitors India’s external-debt levels very closely to prevent it from spiralling out of control. The maximum amount of external commercial borrowing which can be raised by a corporate is $500 million.

What may be different now?

This year, more businesses may want to swap their dollar-denominated loans, which account for more than 50% of India’s loans, with rupee loans for two reasons. First, global interest rates are rising, and second, the rupee has been losing value fairly rapidly. It has already depreciated more than 6% this year. Together, it may make domestic rupee loans more attractive. Consider, a very simple calculation for interest rates on dollar loans—1.5% to 1.75% (benchmark rates in the US) plus 6% drop in the value of the rupee against the dollar, adding up to about 8%. And the Fed plans to continue raising rates. In India, banks’ External Benchmark Lending Rate (EBLR) ranges from 7.4% to 8.6%. So, some experts believe businesses may want to swap external debt with domestic debt to cut their exposure to global macro-economic uncertainties. It could be another way of cutting currency risks to protect margins. True, many businesses hedge their forex exposure with derivatives, but taking a call on the rupee comes with its fair share of risks in these turbulent times.

What about the looming external-debt repayments?

The levels of external debt alone don’t seem to have the central bank worried—for now. In fact, in a recent paper, the RBI argued that India could possibly add another $90 billion to its external debt, raising it from 20% of the GDP to 23%. The central bank and the government would be keeping their fingers crossed and hoping most businesses would be able to roll over their debt as usual. There may be some short-term impact on the rupee, particularly if repayments by businesses are more than expected in the backdrop of an uncertain global macro-economic environment. It could add to the rupee weakness and also possibly make it more volatile in the near term. But, for the moment, it seems India's external debt is manageable and unlikely to spark off an economic upheaval.

Do you know India's rising public debt is a cause for concern? Mint explains what it means for the economy.

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