India’s external debt fears are overblown


The parallel sought to be established between India and Sri Lanka is misplaced; fears are exaggerated.

The size of India’s external debt, its composition and profile, and the ability to repay loans by different categories of borrowers simply do not compare to the worrying situation of the neighboring island nation.

Sovereign debt is a small component

India’s external debt or debt denominated primarily in foreign currencies stood at $620.7 billion at the end of March 2002, according to data released by the Ministry of Finance and the Reserve Bank of India. This is just over $47 billion more than the previous year.

The largest component of this debt pile is 40% foreign loans. These are mainly loans taken out by companies to finance the manufacture of goods or to build ports, airports and other infrastructure projects, all of which are largely commercially viable projects.

Banks and other financial institutions also borrow abroad to lend to customers here who cannot directly access foreign markets. These types of loans represent 25% of the external debt. Much of this fundraising is usually done in US dollars. There are also some in the Japanese yen and a few other currencies. The average term to maturity is three years or more.

Over the last decade or more, foreign borrowing by Indian companies has increased with the growth of the economy and a more liberal policy on such borrowing, and also due to the comfort of large foreign exchange reserves which still exceed 550 billion of dollars even after the RBI spent dollars at a breakneck pace to slow down the rate of depreciation of the rupee.

Other significant components of external debt are Non-Resident Indian (NRI) deposits in foreign currency and rupee accounts, apart from trade credit, which includes buyer credit and supplier credit. These are short term, well under a year.

Sovereign debt is a small component of total external debt

It consists of loans contracted by the government with international organizations, mainly on concessional terms with a long repayment period. These have greatly diminished over time and the situation is far from what it was in the 1990s. The share of public debt in the overall external debt is barely above 20% today.

India is fully capable of servicing its external debt

Lawmaker who made flippant remarks about India’s external debt appears to have misinterpreted or distorted data on lumpy external debt repayments of $267 billion due this fiscal year, or 43.1% of total debt and 44.1% of India’s foreign exchange reserves of $588 billion. . At first glance, the juxtaposition of repayments due and the stock of foreign exchange reserves seems difficult. More so at a time when the rupee is under pressure, with foreign equity investors withdrawing money to put it into safer, higher-yielding investments in the United States, and with foreign and other inflows, including by foreign venture capital funds, shrinking to a halt.

However, a country’s ability to repay its debt on time is reflected and assessed through a few key measures or ratios. Importantly, they are also related to the level of foreign exchange reserves held by a country and the size of its GDP or national income.

Before assessing India’s ability to service its external debt, let’s first understand how India’s foreign currency holdings accumulate. They are mainly based on foreign investment in local businesses, portfolio investment in equity or debt, remittances from Indians living abroad, NRI deposits, external debt flows, export earnings . These are then invested by the RBI in safe and liquid investments globally that can be used quickly. The central bank also uses part of the reserves to intervene in the market to manage the value of the rupee – to ensure that the rise or fall of the currency is not excessively high and to build confidence. A high level of reserves can be a source of liquidity comfort.

Now let’s look at some of the ratios. One of the main ones is the debt service ratio. It is the percentage of debt payments (principal and interest on long-term and short-term debt) relative to exports of goods and services for one year. This means that if there are enough exports and other income, it is quite possible to service the debt. This ratio is 5.2%, a far cry from the time of the 1991 crisis when it was over 35% and a large part of the debt was on the government’s books. Since the 1990s, with the exception of brief surges such as during the global financial crisis and the taper tantrum of 2013, many of these ratios have tended to decline. Other parameters are also relatively comfortable, such as the level of short-term debt to total debt at 20%, the ratio of foreign exchange reserves to total debt at a nuance below 98%, a technical reflection sufficient reserves to cover a good part of the debt that must be repaid or if the capital flees. Also as a percentage of GDP, it is low at 19.9%, compared to many peers. Many of these ratios were much higher in 2013 and 2014.

No sovereign default risk

It is important to note that India is an exception compared to most countries in that it has not borrowed from global bond markets to raise foreign currencies like China, Russia, many countries from Latin America and neighboring Sri Lanka. So there is no fear of a sovereign default on a dollar bond redemption or a renminbi redemption, as Sri Lanka is grappling with. The last such threat was encountered in 1991, when India pledged gold assets to avoid default on its external obligations.

A sovereign default has a huge impact in terms of sovereign ratings, and in turn the penalty it imposes in terms of higher cost of borrowing and access for corporate borrowers. It is not the same as a business default.

Indian companies can guarantee their overseas borrowings

So, without danger of sovereign default, does India still have reason to worry? Not really. Indian companies have assets and sources of income to secure their overseas borrowings, as lenders have likely assessed. The question is, have they hedged adequately, and at viable costs, for the rapid deceleration of the rupee?

A corporate borrower can either refinance its debt when repayment is due or refinance it, taking out new debt and repaying old debt with little impact on foreign exchange reserves. And foreign lenders will lend to Indian companies based on their strength and growth prospects, which is why sustained GDP growth is considered essential. External debt contracted by companies supports GDP growth.

Many companies have the capacity to repay or obtain refinancing, thanks to their export earnings or the strength of their balance sheets.

Most importantly, the RBI continuously monitors and matches the repayment and maturity profiles of external commercial borrowings and its foreign exchange reserves to minimize the mismatch between assets and liabilities. Some mismatch is inevitable even after that, but that’s really no cause for alarm.

Even if there are pressures on the rupiah and if the central bank draws part of its reserves to support the depreciation of the currency, it still also has the possibility of stabilizing the currency and rebuilding the reserves by policy measures. These can take the form of higher interest rates on NRI deposits; allow more liberal borrowing by Indian companies abroad; and the opening of the Indian debt securities market to foreign investors. Two of these measures were announced by the central bank. It’s not as if the upcoming repayments will entirely deplete the reserves, as further inflows may well continue unless there is a major global crisis or ultra-aggressive interest rate hikes at worldwide.

Viewed against the factual position, the fears that were sought to be raised about the adequacy of the RBI’s foreign exchange reserves and the level of external debt appear exaggerated and misplaced.

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