External debt rises to 20% of GDP

External debt rose faster than foreign exchange reserves

India’s external debt rose 8.9 per cent to $376.3 billion as of December 31, 2012, against $345.5 billion as of March 31, 2012, accounting for about 20 per cent of gross domestic product (GDP), official data released on Thursday showed.

As of March 31, 2008, shortly before the crisis period of 2008-09, external debt accounted for 20.3 per cent of GDP. This rose to 20.5 per cent as of December 31, 2009.

External debt rose faster than foreign exchange (forex) reserves, which provided a cover of 78.6 per cent to the external debt stock at the end of 2012, against 85.2 per cent as of March 31, 2012.

Though India’s debt service ratio declined from six per cent as on March 31, 2012 to 5.8 per cent as of December 31, it was unchanged from 2009-10. In 2005-06, the debt service ratio was about 10 per cent. Debt service ratio, which shows the capacity of a country to pay external debt, is the ratio of debt obligations to net current earnings.

The rise in external debt resulted from an increase in both long-term, as well as short-term portions. While long-term debt stood at $284.4 billion at the end of December 2012 (a rise of 6.4 per cent over March-end 2012), short-term debt rose 17.5 per cent to $91.9 billion, data showed. While short-term debt accounted for 24.4 per cent of India’s external debt as on December 31 2012, against 23 per cent as on March 31, long-term debt accounted for 75.6 per cent of the total debt as on December 31, against 77 per cent as on March 31.

The higher the proportion of short-term debt to total debt, the more difficult it is to manage the debt. It was a rise in short-term debt that had led to the East Asian crisis of the 90s. As of now, India’s short-term debt isn’t at an alarming level.

While the rise in long-term debt was primarily due to non-resident Indian deposits and commercial borrowings, short-term debt rose due to trade-related credits.

There is concern on the low forex cover for external debt. Till 2009-10, forex reserves covered the entire external debt. Even in the crisis period of 2008-09, when capital flows from the advanced world dried, India’s forex cover to external debt stood at 112 per cent.

As on December 31 2012, the ratio of short-term debt to forex reserves was 31.1 per cent, compared with 26.6 per cent at the end of March.

The ratio of concessional debt to total external debt fell from 13.9 per cent as of March-end to 12.5 per cent as of December-end, showing the increasing share of non-government debt. At the end of 2012, government external debt stood at $81.7 billion, against $81.89 billion as of March-end; non-government external debt rose from $263 billion to $294.60 billion.

India’s external debt continued to be dominated by the US dollar, which accounted for 56.8 per cent of total external debt as of December 31, 2012, against 55 per cent as of March 31.