Economists advise caution on rising short-term external debt

The country’s short-term external debt has been rising, as a portion of its total overseas debt — and, hence larger amount — is coming up for redemption on past accumulation. Economists do not describe the trend as alarming, but certainly say that it is a cause of concern.

Short-term debt constituted 23.3 per cent of the gross domestic product (GDP) as on December 31, 2011. This is higher than 22.1 per cent as on September 30, 2011, 21.6 per cent as on June 30, 2011 and 21.2 per cent as on March 31, 2011.

As such, redemption pressure on short-term debt also rises. As much as $137 billion dollars of short-term external debt were to come up for redemption in a year time from June 30, 2011, against $129 billion that matured in a one-year period from March 2011, $115 billion from June 2010 and $ 107 billion from March 2010.

The constant rise in the pressure from short-term debt makes India more vulnerable to capital volatility, notes D K Joshi, chief economist, Crisil.

The rupee was able to recover to some extent in February, after it crossed Rs 53 against a dollar in early January this year. However, the rupee again began depreciating and closed at 51.11 against a dollar on April 4.

Even as FII inflows reversed its net seller trend in in 2012 so far and foreign direct investments remained picked up in January 2012, there is no major rise in the foreign currency assets (FCAs) which form a chunk of forex reserves.

The problem could basically be attributed to rising current account deficit, which stood at a record four per cent of the GDP in the first nine months of the last financial year.

“This problem may be further compounded if there is a decline in capital inflows going forward,” according to Soumya Kanti Ghosh, chief economist of the Federation of the Indian Chambers of Commerce and Industry.

“The cumulative FDI and FII inflows from April 2011 to January 2012 stood at $83 billion. However, during the same period, the FCAs have declined by $26 billion.”

The FCAs, which were over $277 billion on June 24, 2011, came down to over $259 billion on March 23, 2012.

Joshi agrees that the net accretion to the FCAs is not taking place. Due to rising short-term debt and not-so-robust foreign exchange accretion, the forex cover to the overseas loans of short-term maturity has been falling over period. For example, as on December 31, 2011, the short-term debt to forex reserves ratio stood at 26.3 per cent, higher than 23 per cent as on September 30, 2011 and 21.7 per cent as on June 30, 2011.