External debt

External debt

Why in the news?

India’s external debt rose to $620.7 billion at end-March 2022, recording an increase of $47.1 billion over the year earlier period, Reserve Bank of India (RBI) data showed.

Details:

• The external debt to GDP ratio declined to 19.9% at end-March 2022, from 21.2% a year earlier.
• Excluding the valuation effect, external debt would have increased by $58.8 billion instead of $47.1 billion at end-March 2022 over end March 2021
• Valuation gains on account of the appreciation of the U.S. dollar vis-à-vis the Indian rupee and major currencies including the Japanese yen and euro was estimated at $11.7 billion.
• India’s long-term debt (with original maturity of above one year) rose to $499.1 billion, recording an increase of $26.5 billion over its level at end-March 2021.
• The share of short-term debt in total external debt increased to 19.6% from 17.6%.
• The ratio of short-term debt to foreign exchange reserves increased to 20%.
• U.S. dollar-denominated debt remained the largest component of external debt, with a share of 53.2%.
• Net claims of non-residents in India increased by $5.6 billion, due to a larger decline in the Indian residents’ overseas financial assets, when compared to the decline in foreign-owned assets in India.

Concept:

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: Inter company Lending

The External Debt-to-GDP ratio

It is the ratio between the debt to the gross domestic product (GDP) of a country. The ratio indicates the capability of a country in repaying its external debts. A country with a low external debt-to-GDP ratio indicates that it is capable of producing and selling goods and repaying its debts without incurring further debt. Various economic and geopolitical factors such as recessions, interest rates, war, etc influence the debt account of a country