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Surge in external debt adds to worry over oil price hike

Sandeep Singh, Sunny Verma
Against the 8.6 per cent growth in last year, the compounded annual growth rate of India s external debt between June 2014 and June 2018 stood at just 3.16 per cent.

Even as the country s foreign exchange reserves are close to their highest ever levels at around $430 billion, the sharp rise in India s external debt over the last couple of years from $485 billion in June 2017 to $557 billion in June 2019 has opened a big gap over the forex cover and potentially renders the economy vulnerable to any external shocks such as a global oil price spike.

As liquidity in the domestic financial market tightened over the last year and companies found it tough to raise funds from banks and non-banking financial companies (NBFCs), India Inc incrementally turned towards foreign markets to raise funds, both for their long-term funding needs and even for short term capital requirement. This resulted in a 8.6 per cent jump in the country s external debt from $513 billion in June 2018 to $557 billion in 2019.

The growth in external debt over the last one year is the highest seen in the last five years since the 11.8 per cent growth recorded in June 2014.

Against the 8.6 per cent growth in last year, the compounded annual growth rate of India s external debt between June 2014 and June 2018 stood at just 3.16 per cent.

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While the long term debt outstanding increased 8 per cent from $414 billion to $447.7 billion over the last one year, the short term debt outstanding rose sharply by 11.1 per cent from $98.7 billion to $109.7 billion.

Economists say the rise in debt levels is on account of slowdown in lending by banks over the last 12-18 months following the IL&FS crisis and their consequenty risk aversion.

India s financial system capacity has gone down and it is the shortage of financial capacity in the country that is forcing people to go and borrow abroad. It is good that the RBI has been supporting by way of easing the regulations on external borrowings, said an economist with a leading global financial services firm.

RBI data shows that while total external debt stood at $224 billion in March 2009, it rose sharply over the next five years to $446 billion by March 2014. While it remained relatively stable over the next four years till 2018, it has risen sharply over the last one year.

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Even during the height of global financial crisis in 2008, India s foreign exchange reserves, at $310 billion, exceeded the then total external debt of about $224 billion and provided a much larger coverage, said the Bimal Jalan Committee that reviewed RBI s Economic Capital Framework noted in its recent report.

This (rising external debt) needs to be taken into account in assessing the external risk being faced by the country and the possibility that the RBI may be required to increase the size of its forex reserves with its concomitant implications for the balance sheet, risks and desired economic capital. This is especially important given that the RBI s public policy objectives of maintaining external stability during a crisis would have to be pursued irrespective of the adequacy of its risk buffers, the Committee said in its report.

In the backdrop of increase in external debt in relation to forex, the Reserve Bank of India (RBI) is working on putting in place a formal mechanism to assess the adequacy of its foreign exchange. An internal group of RBI is working on developing a framework to assess whether forex reserves are adequate to cover various risks.

While the ratio of foreign exchange to external debt stood at 106 per cent in June 2010 and, therefore, forex reserves totally covered the country s external debt, the ratio fell to a level of 69.7 per cent by June 2014. Even as it improved over the following three years to reach 80 per cent by June 2017, it has weakened over the last couple of years and as of June 2019, it stood at 76.7 per cent.

Experts also say the rise in external debt is not something that one should be too much worried about if the crude oil prices remain stable. However, it should be a matter of concern if the oil prices start to rise to levels of $85-$90 per barrel, the economist added. He further added that the fact that external debt comprises multilateral debt and NRI debt and everyone does not start recalling their debt at the same time, should provide some comfort.