India?s yearly external debt servicing burden has nearly trebled to $31.5 billion between FY07 and FY12
Sujan Hajra
India?s external debt situation has considerably worsened in the past few years. The overall foreign debt, the share of short-term debt in total external debt and debt servicing burden are rising fast. Between March 2006 and September 2012, India?s external debt jumped by $226 billion to $365 billion. During the same period, India?s short-term external debt trebled to $85 billion, taking the share of short-term debt in India?s overall foreign debt from 14% to 23%. The change in composition and tenure of debt has been accompanied by major increase in debt-servicing burden. India?s yearly external debt servicing burden nearly trebled to $31.5 billion between FY07 and FY12.
The major reason for the deterioration of India?s external debt situation is the bulging of borrowing by the Indian private sector. Net addition to private sector debt has been to the tune of $192 billion between March 2006 and September 2012. The share of private sector in overall external debt increased from 45% in 2000 to 77% by 2012. Recent years have also witnessed considerable fall in foreign currency asset coverage of India?s external debt. Since the balance-of-payment crisis of the early 1990s, India?s foreign currency assets to external debt ratio increased continuously from 3% in FY91 to 133% by FY08. The ratio is falling continuously since then and was at 71% by September 2012.
A peer comparison also highlights relative worsening of India?s external debt situation. World Bank data shows that among the emerging market (EM) economies, India has the fourth-largest outstanding external debt position. China, Russia and Brazil have larger foreign borrowing compared to India. Yet, as a percentage of gross national income (GNI), India external debt stock is double of China and considerably higher than that of Brazil. Moreover, between 2005 and 2011, while external debt-to-GNI ratios have fallen for these peers, it has increased for India.
Long-term debt servicing and repayment of short-term debt currently entails yearly outflow of close to $120 billion and the number is rising. India needs at least this much yearly debt inflow to keep the overall debt at unchanged level. Any serious disruption in the global financial market would, therefore, mean serious strain on India?s balance-of-payment situation.
There are two main factors that are driving the rapid pace of India?s foreign debt build-up. First, there are serious domestic funding shortages. Second, realising the same and also the crowding out of corporate funding through large domestic borrowing, the government has substantially liberalised external borrowing norms to meet corporate funding needs.
At the macro level, domestic funding situation of any country is decided by the domestic saving situation. From the peak of 37% in FY08, India?s gross saving rate has declined to 31% by FY12 and net savings excluding physical saving by the households has declined by nearly 1,000 bps to 6.7%. The severe scarcity of financial savings is reflected in the slowdown of bank deposit growth to 11% currently from the average of 19% in the last 10 years. Net resource mobilisation by the mutual fund has been negative in three of the last four years. Growth in asset-under-management of the insurance companies has decelerated from the average of 23% in the last 10 years to 11%. The growth in first-year premium collection by the life insurance companies has decelerated from 39% in the last 10 years to 0% in this financial year so far. With slowing income growth, elevated consumer price inflation and anaemic corporate earnings growth, the domestic funding situation is more likely to deteriorate rather than improve in immediate-term future.
Notwithstanding such domestic funding strain, net yearly borrowing by the central government through dated securities has jumped 10 times to close to R5 trillion between FY05 and FY13. In addition, central government has also mobilised a net amount of R500 billion in this year so far through treasury bills. The process has resulted in severe funding crunch for the corporate sector for not only funding of capital expenditure but also in meeting working capital needs.
Keeping these in view, the government has substantially opened up the access of the corporate sector to international debt funding. These steps include liberalisation of norms on interest rate on external commercial borrowing (ECB), liberalisation of norms on the end-use of funds mobilised through ECB and the increase in limits up to which FIIs can invest in the Indian gilt and corporate debt market.
The rapid external debt build-up, especially with rising proportion of short-term borrowing, is not a welcome trend for India. The rising debt servicing outgo and falling foreign currency reserve coverage of external debt are also areas of concern. These obviously do not mean that India is going to face an external debt crisis any time soon. These trends, coupled with the rising share of debt in India?s international liabilities, however, do show that India is moving away from the officially-stated peaking order on foreign inflows?we prefer equity inflows over debt and long-term over short-term inflows. These doctrines, coupled with capital account restrictions, served India well in limiting the contagion effect of the Asian Crisis of the 1990s. We would be significantly more susceptible if a similar crisis happens now.
The author is chief economist and executive director, Anand Rathi Group. He previously served as a director at RBI. Views are personal