India’s short-term debt as a portion of total external borrowings rose to 23.1 per cent at the end of September 2012 against 21.9 per cent a year ago, making the country more vulnerable to shocks from outside. While economists said it is a matter of concern, they are of the view that it has not reached an alarming level.
The situation will become alarming when short-term debt touches at least 25 per cent of the total external debt. Moreover, a portion of the total short-term debt to external borrowings remained at the same level of 23.1 per cent in end-September 2012, compared to end-June 2012.
However, on a long-term basis, it has been rising annually since 2003-04, when it stood at 3.4 per cent of the total debt, and rose to 13.2 per cent in the next year. It stood at 22.6 per cent in 2001-12. The constant rise in the pressure from short-term debt makes India more prone to volatility in capital flows.
“The share of short-term debt rising to 25-30 per cent of the total external debt will be a danger sign,” said Devendra Pant of India Ratings. He called the situation worrying’, but not yet alarming.
Aditi Nayar, senior economist at Icra, cautioned that if the timing of refinancing of short-term debt coincides with the period of liquidity constraints in times of global uncertainty, it will be a great concern. “With the European situation still precarious, liquidity may become a major concern.”
Short-term debt includes all debt having an original maturity of one year or less and interest in arrears on long-term debt.
The Prime Minister’s Economic Advisory Council chairman, C Rangarajan, however, said one should look at the composition of short-term debt. “If the short-term debt comprises a large portion of the long-term debt approaching the maturity period, it is not a serious matter.”
Rating agency Moody’s had earlier justified retaining the stable outlook on India’s ratings at investment grade, saying: “The government’s debt is mostly long-term and held domestically, which lowers the refinancing and exchange rate risks inherent in short term, externally financed debt.”
However, the scenario is changing.
Although the country’s external debt remains manageable, a sudden external shock could cause external liquidity to drop, said an S&P report a few months ago. “This could prompt the government to impose more controls on both capital and current account transactions to contain the immediate risk and potential damage.”
India’s total external debt increased 13 per cent to $365.3 billion at the end of September, against $323.2 billion at the end of the corresponding month last year.
Refinancing of India’s debt also turns expensive with the rupee depreciating in much of 2012. The rupee depreciated to about 55 level against the US dollar at the end of 2012 against 52.86 in the beginning of the year.
Meanwhile, India’s forex cover to external debt depleted to 80.7 per cent at the end of September 2012, compared with 95.4 per cent a year ago. In fact, till the year 2009-10, India’s forex cover to external debt remained over 100 per cent in recent years. It started coming down below 100 per cent in the later part of 2010-11 and stood at 99.5 per cent in end-March 2011.
The forex position has definitely deteriorated compared to the previous year and is worrying, but not alarming, said Pant of India Ratings.
As India’s current account deficit touched a record of 5.4 per cent of GDP in the second quarter of the current fiscal, capital inflows were not adequate to finance it.
In fact, there was an outflow of $ 0.3 billion in the second quarter. As such, there was a marginal drawdown of reserves by $0.2 billion during the quarter. In the previous quarter, there was net accretion to foreign exchange reserves of $0.5 billion.
S&P in its October report had noted that the current account deficits have been counter-balanced by the net inflow of FDI (foreign direct investment) and portfolio investments so far. “However, if the current account deficit shows little improvements going forward, the country’s external position could cease to be a supporting factor for the sovereign ratings,” it had said.
Both S&P and Fitch Ratings had cut outlook on India’s sovereign rating to negative, which means the ratings could be downgraded to junk from lowest investment grade, if the situation worsens.