India’s slumping debt: an economic boost

India’s external debt figures are divided under two broad categories; long-term and short-term. Long-term debt is classified into multilateral, bilateral, IMF, export credit, commercial borrowing, rupee debt and NRI deposits. Short-term debt comprises NRI deposits and trade-related credits.

The further disaggregation of long-term and short-term debt is based on creditor source and the status of borrower. The expansion of India’s exports of services between 1990 and 2015 has been nothing short of spectacular, putting India on a par with the world’s high-income economies in terms of product service superiority and as a share of total exports. This has created unique opportunities for continued growth and financial stability. Government debt is usually a country’s largest financial portfolio comprising complex financial structures that can generate substantial risk to a country’s financial stability.

India’s external debt data is disseminated on a quarterly basis with a lag of one quarter. Statistics for the first two quarters of the calendar year ending March and June are compiled and released by the Reserve Bank of India, while the data for the last two quarters ending September and December are compiled and released by the Ministry of Finance, Government of India. Recently the Ministry of Finance released the external debt data of the country which highlighted:

1.       India’s external debt stock fell by US$ 29.0 billion (6.0%) to US$ 456.1 billion, at end December 2016 over the level at end March 2016. The decline in external debt during the period was due to the fall in long-term external debt, particularly the fall in NRI deposits reflecting the redemption of FCNR (B) deposits and decline in commercial borrowings with fall in both commercial bank loans and securitized borrowings.

2.       The maturity pattern of India’s external debt indicates dominance of long-term borrowings. At end December 2016, long-term external debt accounted for 81.6% of India’s total external debt, while the remaining 18.4% was short-term debt.

3.       Long-term debt at US$ 372.2 billion, declined by US$ 29.4 billion (7.3%) at end December 2016 over the level at end March 2016, short-term debt increased marginally by 0.5% to US$ 83.8 billion.

4.       The valuation gain (appreciation of USD against Indian rupee and most other major currencies) was US$ 7.3 billion. This implies that excluding the valuation effect, the decrease in external debt would have been lower at US$ 21.7 billion at end-December over end March 2016.

5.       The shares of Government (Sovereign) and non-Government debt in the total external debt were 19.6% and 80.4% respectively, at end-December 2016.

6.       Many key external debt indicators of India show improvement at end December 2016 over end March 2016. Besides, total external debt falling by 6.0% during this period, the foreign exchange cover for external debt increased to 78.7% from 74.3% and the ratio of concessional debt to total external debt increased to 9.2% from 9.0%. Though, the share of short-term debt which highlights the original maturity in total debt increased to 18.4% from 17.2% during this period due to rise in trade related credits, the share of short-term debt (residual maturity) in total external debt fell to 41.4% from 42.6%. While the share of short-term debt (original maturity) to foreign exchange reserves increased marginally to 23.4% from 23.1% during this period, the share of short-term debt (residual maturity) to foreign exchange reserves fell to 52.6% from 57.4%.

7.       Cross country comparison of external debt indicates that India continues to be among the less vulnerable countries. India’s key debt indicators compare well with other indebted developing countries. Among the top twenty developing debtor countries, India’s external debt stock to gross national income (GNI) at 23.4% was the fifth lowest and in terms of the foreign exchange cover for external debt, India’s position was the sixth highest at 69.7% in 2015. Contrary to China’s high share of short-term debt to total external debt which has increased in each quarter of 2016, India’s share is low and has decreased. In third quarter of 2016, the shares were 16.8% for India and 55.4% for China.

The maturity profile of India’s external debt continues to be dominated by long-term loans. The composition pattern of India’s external debt has remained about the same at end December 2016 compared to end March 2016, there is a slight fall in the share of long-term debt mainly due to the fall in the share of NRI deposits, with a commensurate rise in the share of short-term debt. The valuation played an important role in declination of this debt, its effect arises because external debt is denominated in different currencies, and the USD value which is the international numeracies for debt, fluctuates over time. The USD appreciated against Indian rupee between the periods of March 2016 to December 2016. Excluding the valuation effect, the external debt would have been higher at US$ 463.4 billion at end-December 2016. The valuation effect over a period (end March to end December) is calculated by applying start of the period exchange rates to end of the period currency components of the debt stock and comparing the resultant figure with the nominal end of the period debt stock.

The currency composition of India’s total external debt shows that the USD denominated debt accounted for 54.7% of India’s total external debt at end December 2016, followed by Indian rupee (31.1%), SDR (5.9%), Japanese Yen (4.4%), Euro (2.7%) and Pound Sterling (0.7%). India’s external debt has remained within manageable limits as indicated by the external debt indicators. The prudent external debt management policy of the Government of India has helped in containing a rise in external debt and maintaining a comfortable external debt position. The policy continues to focus on monitoring long and short-term debt, raising sovereign loans on concessional terms with longer maturities, regulating external commercial borrowings and rationalising interest rates on Non-Resident Indian deposits. It is roughly estimated that every Indian citizen is in a debt of USD 385.