1 min read.Updated: 17 Sep 2019, 12:15 AM ISTLivemint
If policymakers have historically been wary of letting Indian companies borrow too easily abroad, it is because a large debt burden could weaken India’s external balances
Among several measures announced by finance minister Nirmala Sitharaman to ease the housing sector’s liquidity troubles, the wider window for external commercial borrowings (ECBs) is especially interesting. Sources of domestic funding have almost dried up, with banks worried about bad loans having tightened the screws on fresh loans to such an extent that borrowing from them is virtually impossible for real estate firms. As a result, projects across the country are facing delays. In such a situation, companies need to raise funds from overseas. Borrowing costs in developed countries are relatively low. Even if some smaller or weaker developers have to pay a premium on such funds, they may opt for ECBs. Currency risk can always be hedged.
If policymakers have historically been wary of letting Indian companies borrow too easily abroad, it is because a large debt burden could weaken India’s external balances. But given India’s comfortable current account position, this is not a problem at the moment. At around 2% of gross domestic product, India’s current account deficit is well within an acceptable level.
There are some risks. Oil prices have risen sharply, following drone attacks on production facilities in Saudi Arabia. If prices do not descent, an increased oil import bill could threaten India’s comfort on external balances. Yet, the oil spike could be a blip. It’s premature to say which way prices will go these elevated levels. On the whole, letting real estate players get loans from abroad is a good idea. If projects get completed faster, it would help restore the confidence of home buyers and gradually revive demand in this troubled sector.