INDIA BUSINESS WORLD SEPTEMBER (16th - 30th) 2007
The Month that was ...
FOREIGN DEBT SWELLS 22.6% TO $155B IN 2006-07
The country's total foreign debt rose 22.6% to $155 billion in 2006-07 as companies borrowed overseas due to cheaper credit. Commercial borrowings contributed half of this increase. As much as 10% of the increase was because the greenback lost ground to major international currencies. In rupee terms, India's external debt stood at Rs 6,75,857 crore, accounting for 16.4% of the GDP.
"Almost 10% of the addition in total external debt ($28.5 billion) during the year was ascribed to a valuation change as a result of the weakening dollar vis-a-vis other major international currencies. The rise in external debt during 2006-07 in rupee terms was smaller compared to the increase in dollar terms due to appreciation of the rupee against the dollar," according to a statement released by the finance ministry.
In terms of composition, as much as 56% of the increase was accounted for by commercial borrowings, followed by NRI deposits, which constituted 16%. Short-term debt accounted for 12% and multilateral debt constituted 11%. Sovereign debt at $48.6 billion in March-end accounted for 31.4% of the total external debt and 5.3% in relation to GDP.
At the end of March, 49% of the external debt comprised of dollars, 12.9% yen, 17.4% rupees and 2.6% pounds.
According to RBI analysis of external debt released earlier, the debt-to-GDP ratio increased marginally by 0.6% within a year from 15.8% as on March 31, 2006. The ratio was as high as 30.8% on March 31, 1995.
According to World Bank's latest Global Development Finance report, which contains data for 2005, the ratio of external debt-to-gross national income was the second lowest for India after China. The ratio of foreign debt-to-national income for India was one of the lowest among major economies.
The concessional loan component in India's debt portfolio was the highest among the top ten indebted developing countries. Likewise, the ratio of short-term debt-to-foreign exchange reserves was the lowest for India and the share of short-term debt in total debt was the second lowest. India accumulated the least amount of external debt between 1990 and 2005.
While the total external debt stock rose during the year, the movement in critical external debt indicators showed a mixed trend. The debt service ratio - which is the ratio of interest charges and loan repayments to export earnings -showed 'a perceptible improvement', declining to 4.8% last year from 9.9% a year ago, "reflecting a moderation in debt service payments combined with expansion in external current receipts", the report said.
During the period, short-term borrowing grew at a slower pace, up 12% from a year ago, and accounting for just 7.7% of the total debt. Accumulation of a large amount of short-term debt -defined as that maturing in one year or less -makes the economy vulnerable to external shocks.
India's current foreign exchange reserves are about one-and-a-half times its total external debt. Besides, the foreign exchange reserves accounted for a cover of as much as 129% to total external debt stock. Other indicators, such as debt-to-GDP ratio, rose marginally to 16.4%, short-term debtto-GDP ratio grew 1.3%, short-term debt-to-total debt rose 7.7%, and short-term debt-to-foreign exchange assets were up 6.2%.
"Raising sovereign loans on concessional terms and from less expensive sources with longer maturities, monitoring of short-term debt and encouraging non-debt creating flows are some of the important elements of current external debt policy," the ministry has said.
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