India's foreign debt: $306 billion. Reserves $319 billion

While the United States grapples with astronomical domestic debt and European nations with a tangled skein of internecine loans of a nearly similar magnitude, what’s India’s debt mountain looking like?

Not very good.

The government’s domestic debt alone stood at Rs37.7 lakh crore as of March 31 this year, or a colossal 77% of GDP.

Corporate sector debt was not very different either: at around Rs30 lakh crore at the end of fiscal 2010 (the latest data available), it’s 62% of GDP.

But more importantly, India’s external debt stands at $305.9 billion, or 17.3% of GDP, according to the Reserve Bank of India (RBI) data.

That’s almost as much as the foreign reserves India has today, which is $319 billion as of July 29.

External debt surged 17.2%, or by $45 billion, in the last one year alone, primarily due to an increase in commercial borrowings, short-term trade credits, and bilateral and multilateral borrowings. And almost 60% of India’s external exposure is in dollars, data show.

So a rise in the value of dollar will make repayments more burdensome, while a fall will have the opposite effect.

In this fiscal alone, India’s debt servicing commitments (principal and interest payments) are estimated at close to $85 billion by experts.

Significant inflows are crucial to offset this outflow. “Otherwise there will be pressure on India’s foreign exchange reserves and the rupee,” said Madan Sabnavis, chief economist at Care Ratings. The situation is delicate because the tilt is more towards outflows than inflows now.

Other economists, however, don’t see a cause for concern — yet.
“India’s external debt has, for some time now, not been the primary concern. Within the overall debt, the share of short-term loans has risen a little more but there is no immediate risk because the endeavour of the RBI is always to keep the ratio of short-term debt to overall debt lower,” said Samiran Chakraborty, chief economist, Standard Chartered Bank.

In an environment of risk aversion, he said, it’s this ratio that’ll be closely watched.

Anis Chakravarty, director, Deloitte Haskins & Sells concurs. “This ($305.9 billion) is not something to be repaid immediately. But over a period of time, how India manages to service the debt will determine whether this becomes an issue or not.”

Commercial borrowings — or those by companies — form 28.9% of the total external debt followed by short-term debt at 21.2%, non-resident Indian deposits at 16.9% and multilateral debt at 15.8%.

But what worries is India’s external debt to GDP ratio has been falling. “Meaning, in the last few years — say, since 2008 — debt has been rising but there has not been any commensurate increase in the forex reserves,” said Siddhartha Sanyal, chief economist with Barclays Capital.

India’s external debt to GDP ratio fell to 17.3% last fiscal compared with 18% in fiscal 2010.

Sanyal said another critical factor in this context is the exchange rate movement. “If rates move within a reasonable band it won’t be a concern. But if the dollar appreciates a lot, it can add pressure to the debt-servicing burden.”

He does not foresee such a situation, though.