Planning Commission principle advisor Pronab Sen says forex to external debt should not be an issue but forex reserves to short-term debt can be one.
Amid a debate over economic crisis in Europe affecting payment liability of India Inc, foreign exchange (forex) reserves dipped below external debt to 99.5 per cent as on March 30 — and further plummeted to 95.4 per cent as on September 30.
The ratio of forex reserves to total external debt was not as bad as 7 per cent at the time of Balance of Payments (BoP) crisis in 1990-91, but it has significantly come down from as high as 138 per cent at end-March 2008.
Economists do not find the falling forex reserves to external debt ratio alarming as of now, since all the external debt will not come to be paid at once. Even so, some of them say four to five percentage down from here could be a wake-up call for the economy. “A couple of percentage down at 91-92 per cent will be a matter of concern,” says Arun Singh, senior economist, Dun and Bradstreet. “Our external debt has not gone up significantly, but forex reserves are getting depleted.”
The country’s total external debt stood at 326.6 billion dollars as on September 30, 2011, while forex reserves were around 311.6 billion dollars.
According to Anis Chakravarty, director, Deloitte, Haskin and Sells, India still has one of the highest forex reserves in the world. “The problem will arise if on a sustainable basis we fund our deficit through reserves.” However, the phenomenon is only for a term that may last only for two more quarters, he adds. “Things will start looking up then on.”
According to India’s External Debt report by the Ministry of Finance, the increase in the country’s external debt at end-September 201 over end-March 2011 has been primarily on account of higher commercial borrowings and short term debt. These two components have in unison contributed over 80 per cent of the total increase in the country’s external debt during the period. The rise in short-term trade credits are in line with the increase in imports associated with reasonably strong domestic activity.
Former Chief Statistician Pronab Sen, who is now Planning Commission principle advisor, says forex to external debt should not be an issue. “But, forex reserves to short term debt can be one, though it is not yet a matter of concern.”
Short-term external debt is way below forex reserves. Forex cover to short-term external debt stood at over 435 per cent as on September 30, 2011.
Madan Sabnavis, chief economist, CARE Ratings, says forex reserves to external debt will not be a major reason to worry, but short-term debt could fuel concern. Though, short term debt comprised only 21.9 per cent of external debt as on September 30, it rose 10.1 per cent from March 30 levels. Long-term debt rose just 5.6 per cent.
“This is a matter of concern to an extent, as credit crunch in international market is leading to rise in risk premium,” says Singh. According to Chakravarty, the larger issue is the confidence level on India eroding.
The finance ministry, in its report, has raised “some” concern over increase in ECB as depreciation of rupee leads to higher debt service burden in terms of Indian currency that could impact profitability and the balance sheets of corporate borrowers.
Chakravarty agrees. “If the rupee has a free fall — say, it touched 60 per dollar — servicing the debt will become a humungous,” he notes. Singh says the forex and debt position is not really against us at this point. “It matches our fundamental and well within our control, only if the forex to external debt falls further will it be a serious concern.”
After the release of the report, forex reserves touched a one-year low on December 30, falling $4 billion to $297 billion as against $301 billion in the week before. In fact, forex reserves have seen a sharp dip of $24 billion since early September 2011, whereas rupee has depreciated nearly 20 per cent since August 2011.
However, then ECBs, which are the most favoured route to borrow funds due to interest rate advantage, fell to $1.2 billion in November from $4.12 billion in July. This would not allow a significant fall in forex-external debt ratio.
Companies do not have the ability to borrow at this point of time due to slow growth and rupee depreciation, says Chakravarty. “Most borrowings from guaranteed banks need to pay huge collateral,” he adds. Recently, an issue was raised in certain quarters over a crisis in Europe disturbing debt obligations of India Inc. The issue was triggered since the Bank of International Settlements website shows that consolidated foreign claims on India were at $325 billion as on June 30, 2011. Of this, European banks accounted for $148 billion.
The finance ministry seeks to play down the concerns, saying India owes a total of $206 billion to other countries, of which European banks’ exposure is only $18 billion.
According to the ministry, total foreign currency convertible bonds/external commercial borrowings repayment liability in 2012 stood at $20 billion. Similarly, total trade credit was $18-19 billion and only 10-12 per cent of the amount originated from Europe, according to the ministry. The total amount, others owed India stood at $36 billion and the share of European entities in it was $2.4 billion.