INDIA BUSINESS WORLD - March 16th - March 31st - 2008
ECB’S SHARE IN OUTSTANDING EXTERNAL DEBT RISES TO 25% IN 2006-07
India’s external debt has grown 20% in 2006-07 — the highest in any year since 2000-01. Apparently, this will indicate an increase in the magnitude of India’s external indebtedness. True. The finance minister, however, is confident that the country’s huge foreign exchange reserves will act as a guarantee against any external turmoil. But more importantly, a closer look reveals that much of the additional external debt this time has, in fact, come as components of growth rather than as a burden.
External commercial borrowings (ECB), trade credits (short term and long term), multilateral debt and NRI deposits were the key drivers to the growth in external debt stock in 2006-07. The rise in commercial borrowings by over Rs 64,000 crore during the year reflected strong investment demand domestically as well as favourable financing conditions overseas.
Indeed, following improved investment conditions back home, commercial borrowings have increased by a huge 50.4% last year compared to only 2% rise in the previous year. The share of commercial borrowings in total outstanding external debt as a result, has increased to about 25% in 2006-07 from 19% in 2005-06. Incidentally, ECB’s share was just about 14% a decade ago. Commercial bank borrowings accounted for 60% of ECB loans while about 38% was accounted for by securitized borrowings including foreign currency convertible bonds (FCCBs). The rise in the share of commercial borrowings clearly indicates change in India’s image abroad and its growing acceptability as an investment destination.
The government at the other end has reduced its exposure to external loans substantially during this period. The share of government’s multilateral borrowings in total outstanding external debt has declined from 21.7% in 2005-06 to 19.2% last year. The share of government’s multilateral borrowings in total external debt kitty of course, has been steadily declining over the years. It was as high as 28% in 2001-02. Similarly, the share of government’s bilateral borrowings too has declined by 1.6 percentage points from 8.9% in 2005-06 to 7.3% last year. Its share in total external debt was 12% at the beginning of the present decade.
And not only has the government’s share in external debt declined, but what is probably more important is that the larger part of the debt is concessional. The amount of non-concessional debt may have increased at a higher rate compared to the concessional debt in 2006-07, but the share of non-concessional loans was still much lower compared to that of the concessional loans. The share of multilateral concessional debt of the government was estimated at 15% in 2006-07 against only 4.5% of non-concessional loans.
There are, however, ample reasons for caution also. For, if the rise in the share of investible funds in the external debt basket is causing optimism, the sharp rise in short-term debt in both POL and non-POL imports has the potential to dampen the growth prospects likewise. Take for example, the rise in short-term debt. It recorded 31% in 2006-07 over the previous year reflecting the sharp rise in both POL and non-POL imports. And although, the NRI and FC (B&O) deposits have grown at a somewhat lower rate last year, their share in aggregate outstanding debt continues to be very high. NRI deposits accounted for about 24.3% of total debt. It’s share was only 13.8% at the beginning of the decade.
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