India's total external debt increased by 2.8 per cent to USD 558.5 billion at the end of March mainly on account of a rise in commercial borrowings, according to a report released by the Finance Ministry. The external debt stood at USD 543 billion at end-March 2019.
The ratio of foreign currency reserves to external debt stood at 85.5 per cent as at end-March 2020, as compared to 76.0 per cent a year ago, the report said. External debt as a ratio to GDP rose marginally to 20.6 per cent as at end-March 2020 from 19.8 per cent a year ago, 'India's External Debt: A Status Report: 2019-2020' showed.
Compared to end-March 2019, sovereign debt shrank 3 per cent to reach USD 100.9 billion, it said, adding, this decrease was primarily due to a fall in FII investment in G-Sec the second largest constituent by 23.3 per cent to USD 21.6 billion from USD 28.3 billion a year ago. Loans from multilateral and bilateral sources under external assistance the largest constituent of the sovereign debt grew 4.9 per cent to USD 87.2 billion, it said.
Non-sovereign debt, on the other hand, it said, rose 4.2 per cent to USD 457.7 billion mainly due to an increase in commercial borrowings the largest constituent by 6.7 per cent to USD 220.3 billion. Outstanding NRI deposits the second largest constituent at USD 130.6 billion was almost equal to the level a year ago, it said.
In most emerging markets, as the economy expands, foreign debt typically accumulates to address shortage of domestic savings, India is no exception to this phenomenon. Economic activity in India influences the accumulation of external debt, reflecting the policy over the years of enabling private sector to access foreign debt and this was reflecting as stock of non-sovereign debt (private sector debt) is four times that of the sovereign debt at end-March 2020.
Further, it said, non-financial corporations are the biggest debtors, accounting for 42 per cent of total debt, followed by deposit-taking corporations (28.3 per cent), and general government (18.1 per cent). However, as the momentum of economic activity slowed in 2019-20, the private sector's appetite to access foreign debt ebbed, resulting in relatively lower growth of 6.7 per cent in the stock of commercial borrowings as at end-March 2020 when compared to that recorded during the first five years of the previous decade.
The report observed that the stock of NRI deposits as at end-March 2020, being almost equal to the level recorded on March 31, 2019, needs to be seen in the context of, among others, softening of interest rates on NRI deposits. "About 81 per cent of the total stock of external debt is long-term, i.e., having maturity of greater than one year, predominately in the form of commercial borrowings and NRI deposits," it said.
Remaining 19 per cent of debt is short-term, primarily in the form of short-term trade credit. Short-term trade credit, constituting about 95 per cent of the total short-term debt, is used for financing imports. Noting that the US dollar is the predominant currency for denomination of India's external debt with a share of 53.7 per cent of the total debt as at end-March 2020, it said, the US dollar appreciation as on March 31 this year over the level a year ago resulted in a valuation gain of USD 16.6 billion.
In other words, it said, excluding these valuation gains, increase in India's external debt as at end-March 2020 over the level a year ago would have been USD 32 billion. Thus, moderation in accumulation of India's external debt as at end-March 2020 reflected, among others, slowing economic activity and appreciating US dollar.
Going forward, the report said as the economic activity in India gathers pace and gains traction, stock of external debt would increase. However, there does not appear to be any cause for concern given the benign level of debt vulnerability and rising domestic savings would counter-balance the imperative of accessing foreign debt.
Thus, while augmenting growth would lead to foreign debt levels increasing, rising savings would moderate such rise in foreign debt levels, it said.
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