The Hindu Business Line : Borrowing more abroad

The real picture on external commercial borrowing, especially rising short-term debt, is troubling, and could be further distorted by the uncertain economic outlook.

Take a look at the April-May figures on external commercial borrowings and it will come as no surprise that along with big-ticket Indian companies seeking cheaper money abroad are a host of small and medium enterprises. With the Reserve Bank of India doggedly raising interest rates and the US Fed lowering them, the interest rate differential for Indian borrowers is so wide that an increasing number of firms are seeking funding abroad, not just for acquisitions but also for capital goods. This global reach of Indian borrowers is now strikingly reflected in the volume and composition of India’s external debt, as revealed in the data to end March 2008. By that month, the country’s external debt had risen to $221.2 billion, up 30.4 per cent over end-March 2007, when it was $169.7 billion.

Almost every indicator of debt exhibited an increase, though ECBs, including Foreign Currency Convertible Bonds, recorded the maximum addition. They grew to $62 billion from $42 billion last year, recording a 28 per cent share of the total. The RBI notes that the rising financial requirements of Indian companies on account of their ongoing technological upgrades and capacity expansion contributed to this increase. But other components too registered a hike, including short-term debt — the second highest, with a share of 20 per cent — almost doubling to $44 billion, while NRI deposits followed closely with $43 billion. On the other hand, multilateral debt increased to $39.3 billion, and bilateral to $19.6 billion; in short, private debt registered a quantum jump in a trend evident over the past few years. Even after the dollar’s depreciation against other currencies and the rupee had added $9.9 billion, the rise in total external debt and the specific components of private debt is substantial and indicates its new capital requirements.

Reflecting this shift, the government has refined the data even more. Short-term debt had so far been defined to include debt of one-year maturity but not suppliers’ credit of less than a year, typically 180 days, and FII investments in government paper of short maturities, all of them being shown as long-term debt. But now they are disaggregated and provide a truer picture of short-term debt. And that picture could get alarming. Long-term debt still accounts for 62 per cent of total debt; the debt-service ratio at 5.4 per cent has more than halved since 2003-04, the debt-GDP ratio, 30 per cent in 1995, has fallen to 18 per cent. But short-term debt is rising as a ratio of foreign exchange reserves. Uncontrolled inflation and an uncertain economic outlook could queer the pitch.

Related Stories:
External debt up 30%
ECB inflow slows down in April-May
‘Raising funds thru ECB route may slow down’

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