India- External Debt: A Status Report, 2008-09

India’s External Debt: A Status Report, 2008-09

Department of Economic Affairs, Ministry of Finance has been publishing ‘India’s External Debt: A Status Report’ on a regular basis since 1993.  The current volume of the Report, the fifteenth in the series, covers developments in India’s external debt during the year 2008-09. It also provides an analytical presentation of India’s external debt statistics. A cross-country comparison presents India’s external debt position in the international perspective. 

Global financial crisis impacted capital flows including debt flows to India during the second half of 2008-09. Amongst the debt components, the decline was particularly sharp in External Commercial Borrowings (ECBs) with net ECB flows at US$ 8.2 billion in 2008-09 as against US$ 22.6 billion in 2007-08. Short-term trade credit flows (net) turned negative at US$ 5.8 billion during 2008-09 as compared with an inflow of US$ 17.2 billion during 2007-08. Banking capital excluding NRI deposits also recorded an outflow of US$ 7.7 billion in 2008-09 while there was a net inflow of US$ 11.6 billion under this head in 2007-08. In addition to the direct impact on debt flows, the cost of funds increased sharply on account of tight liquidity conditions in the international financial markets. Furthermore, the depreciation in the Rupee exchange rate against major international currencies in 2008-09 resulted in higher debt service payments in Rupee terms.

Reflecting the impact of global financial crisis on debt flows, India’s external debt stock at US$ 229.9 billion at end-March 2009 recorded an increase of US$ 5.3 billion (2.4 per cent) during 2008-09 as compared with an increase of US$ 53.2 billion (31.1 per cent) during 2007-08. The lower rate of rise in India’s external debt during 2008-09 was on account of valuation effect attributed to appreciation of the US dollar vis-à-vis other major international currencies, and moderation in debt components, particularly commercial borrowings and short-term trade credits reflecting the impact of tightness in international capital markets due to the crisis. In terms of rupees, India’s external debt recorded a higher rise of 30.2 per cent during 2008-09 (20.2 per cent in 2007-08), due to Rupee depreciation.

Government (Sovereign) external debt declined to US$ 54.9 billion as at end-March 2009 from US $ 56.9 billion at end-March 2008. Its share in total external debt was lower at 23.9 per cent as at end-March 2009 (25.4 per cent at end-March 2008). Government guaranteed external debt was marginally up to US$ 6.8 billion at end-March 2009 (US$ 6.6 billion at end-March 2008). Government debt and government guaranteed debt aggregated to US $ 61.7 billion at end-March 2009, accounting for 26.8 per cent of total external debt.

In terms of key debt indicators, external debt position remained comfortable during the year under review. India’s foreign exchange reserves provided a cover of 109.5 per cent to the external debt stock as at end-March 2009 (137.9 per cent at end-March 2008). Debt service ratio declined further to 4.6 per cent in 2008-09 from 4.8 per cent in 2007-08. The ratio of external debt to Gross Domestic Product (GDP) stood at 22.0 per cent during 2008-09 (19.0 per cent in 2007-08). The ratio of short-term debt to foreign exchange reserves posted a rise from 15.2 per cent at end-March 2008 to 19.6 per cent at end-March 2009 and the ratio of short-term debt to total external debt also increased marginally from 20.9 per cent to 21.5 per cent during the same period.

A comparative picture of India’s external debt vis-à-vis other developing countries for the year 2007, as brought out by the World Bank’s Global Development Finance, 2009 indicates that India was the fifth most indebted country amongst the top twenty debtor countries of the developing world in 2007. The ratio of India’s external debt stock to Gross National Income (GNI) at 18.9 per cent was the sixth lowest with China having the lowest ratio of external debt to GNI at 11.6 per cent. In terms of foreign exchange cover of external debt, India’s position was the fifth highest at 125.2 per cent after China, Malaysia, Thailand and Russian Federation.

During the financial year 2008-09, significant policy initiatives were undertaken relating to external commercial borrowings, short-term trade credits and non-resident deposits. The policy measures relating to external commercial borrowings indicated a move towards liberalisation in terms of expanding the list of eligible borrowers, easing all-in-cost ceilings, relaxations in end-use stipulations, etc. The all-in-cost ceiling applicable to short-term trade credits was raised, taking into account higher cost of funds in international capital markets. The interest rates on NRI deposits were also raised to counter the effect of global financial crisis on debt flows to India. The ceilings on investment of FIIs in Government securities and corporate bonds were also enhanced during the year.  These measures have been possible due to comfortable external debt position of the country.

The complete Report is available on the website of Ministry of Finance – http://www.finmin.nic.in/reports/index.html.