Short-term external debt sees decline

After assuming a high proportion of 23.6 per cent at the end of 2012-13, India's short-term external debt accounted for only 17 per cent of total foreign debt as on December 30, 2015, official data showed. This indicates a comfortable position of the country's foreign debt position, since a large portion would come up for redemption after some time.

This also justified the Reserve Bank of India (RBI)'s recent move to ease external commercial borrowing (ECBs) norms as ECBs fall under long-term debt. At the end of December 2015, India's external debt stood at $480.2 billion, recording an increase of $4.9 billion (one per cent) over the level at end-March 2015.

The maturity pattern of India's external debt indicates dominance of long-term borrowings. At end-December 2015, long-term external debt accounted for 83 per cent of the country's total external debt, while the remaining 17 per cent was short-term debt. If an overwhelming portion of a country's external debt comprises the short-term variety, it creates problem, if returns on them are to come in the medium to long run. That had precisely happened in the southeast Asian crisis in the latter half of the 1990s.

The share of short-term debt on India's total foreign debt declined to 17 per cent as of end-December 2015, compared to 17.6 per cent as of end-September 2015, and 17.3 per cent as of end-June 2015. It remained less than 18 per cent of the total external debt in 2015-16 till December.

For five years since end-2009-10 till the end of 2013-14 - short-term external debt accounted for around 20 per cent of the overall overseas borrowings.

As of end-2012-13, the share was the highest in the recent past owing to widening trade deficit and, in turn, current account deficit. That time, the external debt stock stood at $390 billion at end-March 2013, recording an increase of 12.9 per cent over $345.5 billion at the same time in 2012.

The increase was primarily attributed to short-term debt that accounted for 41.6 per cent of the rise in total debt. Short-term debt witnessed high growth because of a rise in trade credits.

Also, the elevated level of current account deficit (CAD) in 2012-13 has resulted in increasing the financing requirements from both debt and non-debt capital flows. While non-debt capital flows continue to remain the major source of financing, debt flows are increasingly assuming importance in the financing of CAD, which rose to an all-time high of 4.8 per cent.

On the other hand, trade deficit was just $99.2 billion during April-December 2015, against $111.6 billion in the year-ago period. CAD narrowed to 1.4 per cent of gross domestic product in April-December 2015 from 1.7 per cent in the corresponding period of 2014-15, on the back of the contraction in trade deficit.