India’s external debt went up sharply by over $50 billion for the financial year ended March 2008 — the highest year-on-year increase ever in last 18 years.
A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies are being cited as reasons for the increase.
External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year, said a Finance Ministry report.
The external debt of India, Asia’s third largest economy, rose by $83 billion in less than three years (between March 2005 and March 2008), while it took fifteen years for the external debt to increase by $54.3 billion to touch $138.1 billion.
External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, rose 40 per cent to touch $70.6 billion in 2007-08, as compared to $48.52 billion a year-ago.
The last two years saw the sharpest increase in ECB at $38.29 billion. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.
In order to curb inflows via the ECB route, the finance ministry withdrew exemption given to ‘development of integrated township’, which was the only part of real estate sector where ECB proceeds were permitted.
The government also revised downwards the cost ceilings for ECB borrowings.
Further, it has set a limit of $20 million per borrower in a financial year, and any borrowing above $20 million have to used only for foreign currency expenditures.
Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.
Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation.
Despite the huge increase in external debt, union finance minister P Chidambaram, in his foreword to the report, said: “Though India’s external debt stock increased during 2007-08, all the major solvency and liquidity indicators of external debt remained in the comfort zone”.
The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”.
As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt increases.
In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.
Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting higher share of private borrowings.
Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08.
For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.
“India’s external debt has remained within manageable limits owing to cautious external debt policy pursued by the government”, said Chidambaram.
Compared to other developing countries, India’s debt service ratio was the second best after that of China’s and in terms of credit ratings, India was four places behind China.
