Moody's warns India about risks on external debt & food supply

Moody’s Investors Service has cautioned that India’s economy could face problems in the long run, if it does not manage risks emanating from significant increase in foreign borrowings by the private sector, asset quality of public sector banks and demand-supply mismatch of food items on account of rising incomes.

Moody’s, however, maintained that its outlook on India’s investment grade rating was stable.

“Sovereign vulnerability to event risk could rise over the longer term, if three emerging risks are not contained over the medium term,” Moody’s said in its credit analysis of its rating outlook for India.

It said that foreign borrowing by the private sector had grown significantly over last decade. This rising private sector leverage, according to Moody’s, is unlikely to lead to a balance of payments crisis over the outlook horizon, because it is balanced by a rise in private sector foreign exchange (forex) earnings and official forex reserves between 2003 and 2008.

However, it added, “We will be monitoring trends in both leverage as well as foreign exchange earnings to service this leverage to determine whether the cross-border activities of the companies are heightening sovereign risk.”

Another ratings agency, Standard & Poor’s (S&P), said in its latest report that, although India’s external debt remained manageable, any unexpected disturbance could cause external liquidity to drop.

“This could prompt the government to impose more controls on both capital and current account transactions to contain the immediate risk and potential damage”, the report said.

According to the finance ministry’s report on external debt, India’s external vulnerability indicators have witnessed some signs of stress in the recent period.

India’s external debt went up 13 per cent in 2011-12 to $345.8, compared to the previous financial year. In 2005, it was just around $140 billion.

Short-term debt’s share in total external debt went up from 21.2 per cent in 2010-11 to 22.6 per cent in 2011-12. The share was just 14 per cent in 2004-05. Short-term debt to foreign exchange reserves went up to 26.6 per cent in 2011-12, from 21.3 per cent in 2010-11 and 18.8 per cent in 2009-10.