External debt

External debt

Subject: Economy

Section: External Sector

Context:

India’s external debt continues to be sustainable and prudently manageable

Key Developments:

• India’s external debt increased by $11.5 billion sequentially in October-December 2021 and it rose by $46.6 billion on a year-on-year basis.
• The percentage of the external debt to the Gross Domestic Product (GDP) declined slightly to 20 per cent as of December-end 2021 from 20.3 percent as of September-end 2021.

Concept:

• The appreciation of the US dollar against other major currencies such as the euro and yen helped limit the rise in external debt.
• The short-term debt, on a residual maturity basis, accounted for 43.1 percent of the foreign exchange reserves as on December 31. (i.e., debt obligations that include long-term debt by original maturity falling due over the next twelve months and short-term debt by original maturity)
• As much as 52.0 per cent of the external debt was denominated in US dollars at the end of December 2021.Rupee debt constituted 32 per cent, while debt in yen and euro made up 5.3 per cent and 3.1 per cent respectively.
• The forex reserves cover ratio is 103 per cent (A cover ratio of 90 percent-plus is considered comfortable).
• The ratio of short-term debt has increased to 18.1 percent from September, but is still lower than the pre-pandemic times
• Commercial borrowings remained the largest chunk of the external debt, with a share of 36.8 percent. Non resident deposits follow with 23.1 per cent, and short-term trade credit is the third-largest component at 18.0 per cent.
• Debt with an original maturity of up to one year rose to 18.6 percent of the total external debt from 17.4 percent as on September 30. While this is a small number, short-term debt on a residual maturity basis – debt that must be repaid in the next 12 months, irrespective of original maturity – rose to 44.4 percent of the total from 43.2 percent at the end of September 2021.

External debt: It refers to money borrowed from a source outside the country. External debt has to be paid back in the currency in which it is borrowed. External debt can be obtained from foreign commercial banks, international financial institutions like IMF, World Bank, ADB etc and from the government of foreign nations. Normally these types of debts are in the form of tied loans, meaning that these have to be used for a predefined purpose as determined by a consensus of the borrower and the lender.

Governments and corporations are eligible to raise loans from abroad. These are in the form of external commercial borrowings. The interest rate on foreign loans is linked to LIBOR (London Interbank Offer rate) and the actual rate will be LIBOR plus applicable spread, depending upon the credit rating of the borrower.

Debt Profile – External debt is classified as ‘External Commercial Borrowing’, ‘Currency Convertible Bonds’ and ‘Government Borrowings’.

Composition of India’s external debt

• Multilateral -Multilateral institutions such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) etc are regarded as multilateral creditors.
• Bilateral – nations that engage in sovereign and non-sovereign arrangements such as one-to-one loan arrangements are bilateral creditors. India’s bilateral creditors are Japan, Germany, the United States, France, etc.
• International Monetary Fund –loans from IMF in form of SDR
• Trade Credit -It is when the loans and credits are extended for imports by overseas suppliers, banks and financial institutions to sovereign and non-sovereign entities.
• Commercial Borrowings -It includes borrowings from commercial banks, financial institutions, money that is raised through issuing securitized instruments such as bonds, floating rate notes (FRN), securitized borrowing of commercial banks etc.
• NRI Deposits (above one-year)
• Rupee Debt 
• Total Long-Term Debt– is debt with an original maturity of more than one year
• Short-term Debt– is defined as debt repayments on-demand or either with an original maturity of one year or even less.

Composition in terms of government and non government external debt:

• Government Debt 
  •  External Debt on Government Account under External Assistance       
  •  Other Government External Debt-includes defence debt, investment in Treasury Bills/government securities by FPIs, foreign central banks and international institutions and IMF.
•  Non-government Debt       
  • Central Bank
  • Deposit-taking Corporations, except the Central Bank
  • Other Financial Corporations
  • Non-financial Corporations
  • Households and nonprofit institutions serving households (NPISHs)
  • Direct Investment: Intercompany Lending

External debt sustainability:

A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default. External debt sustainability can be measured based on the following parameters:

• Government’s debt and current fiscal revenue ratio.
• The overall share of short and long-term debt in the total debt burden.
• Share of concessional debt.
• Foreign debt to exports ratio
• Debt to GDP ratio
• The share of external debt to the total debt of the country.

Read More: https://optimizeias.com/external-debt/