External debt risk: India got safer by Dec 2014 compared to six months before

The proportion of short-term loans in overall debt, the debt to GDP ratio and forex cover showed improvement

India seems less vulnerable to external  debt shocks at the end of 2014, compared to six months earlier.

Key parameters such as proportion of short-term loans in overall debt, the debt to gross domestic product (GDP) ratio and foreign exchange (forex) cover showed improvement over the period.

Data issued by the finance ministry showed short-term debt to the overall total fell to 18.5 per cent as on December-end against 20.5 per cent at the end of March 2014. In absolute terms, short-term external debt was $85.6 billion at end-December, a fall of 6.7 per cent over the level at end-March.

Short-term debt is generally considered riskier than the long-term one. And, ought to be in line with the   number of years that the projects for which these are taken begin yielding returns. The East Asian crisis of the late  1990s erupted as short-term debt rose and went into financing real estate which had a long gestation period.

Overall, the country’s external debt rose slightly by  3.5 per cent (increase of $15.5 billion) to $461.9 billion during the six-month period. This was mainly due to a rise in external commercial borrowing and deposits of non-resident Indians (NRIs), due to high interest rates here.

ECB rose to $170.8 billion from $163.8 billion over the period. NRI deposits went up to $110.1 billion from $108.7 billion.

“A decline in short term external debt during the third quarter (October-December) restricted the increase in total external debt to $4.3 billion, in spite of the continued rise in commercial borrowing and NRI deposits,” said Aditi Nayar, senior economist with ICRA, the ratings agency.

Forex reserves to total external  debt, another measure to judge proneness to external shock, rose to 69.4 per cent from 68.1 per cent in the period. The forex cover to short-term external debt rose  to 73.3 per cent from 69.9 per cent.

The other parameter, the total debt to GDP ratio, fell to 23.2 from 23.7 during this period.

The debt-service ratio, a proportion of gross debt service payments to external current receipts (net of official transfers), remained static at 5.9 as on March 31, 2014, compared to a year before. This data is provided at the end of a financial year.