Private players dominate external debt growth amid economic recovery

As the economic recovery gathered pace, private actors dominated the country’s external debt growth in FY 2021-22 (FY22), unlike FY21.

Of the overall 8.2% growth in the country’s external debt at the end of March, the share of non-sovereign external debt (excluding SED) stood at around 60% compared to 29% a year ago. .

In a normal year, it is the relative movements of non-SEDs that influence the dynamics of the external debt. During the pandemic year, on the contrary, it was the growth of the SED that accounted for a larger share of the overall growth of external debt due to Covid-19 loans from multilateral institutions.

“As the pandemic receded and normalcy was restored with the recovery of the economy, India’s usual external debt dynamics returned as a non-SED growth contribution to the overall growth of [external debt] doubled at the end of March 2022 compared to a year ago, as growth-sensitive commercial borrowing and import-sensitive short-term commercial credit increased,” said a document on the external debt situation, published recently, by the Ministry of Finance.

The country’s external debt rose to $620.7 billion at the end of March 2022, from $573.5 billion the previous year. Of the $47 billion increase in external debt, $28.17 billion is attributable to private actors and the rest to the state.

This was not the case in FY21. Of the $15.27 billion increase in external debt, private actors accounted for $4.52 billion or 29.6%, while the overwhelming majority of about $10.75 billion or more of 70% was borrowed by the government, according to the data provided in the situation document.

The case was different in FY20, when the SED fell 3% due to a decline in foreign institutional investment in government securities. However, the external debt of the private sector had increased by 4.2%.

The pick-up in economic activity in FY22 has rekindled appetite for access to external debt, particularly by non-financial corporations in the form of External Commercial Borrowing (ECB), which constitutes the main component of commercial borrowings. In addition, while imports jumped 55.2 percent during the year, short-term trade credit, which is primarily used for import financing, also increased, according to the status paper.

Vulnerability rate

The country’s external debt vulnerability indicators remained favorable. First, external debt as a percentage of gross domestic product (GDP) fell slightly to 19.9% ​​at the end of March 2022, from 21.2% a year ago. It has hovered around 20% in recent years.

Second, although short-term debt as a percentage of total external debt increased to 19.6% at the end of FY22 from 17.6% a year ago, it remained within prudential limits. . Short-term debt has increased due to the surge in imports, as shown above. In recent years, short-term debt has accounted for 17-20% of the country’s total external debt. It is very important to keep short-term debt under control, as their increase led to the East Asian crisis in the late 1990s.

Although foreign exchange reserves, which act as a buffer against external sector vulnerabilities, are below 97.8% of external debt at the end of March 2022 to 100.6% a year ago, they are sufficient in the event of a external shock.

Debt service ratio fell significantly to 5.2% in FY22 from 8.2% in the prior year, reflecting buoyant current receipts and subdued service payments external debt. The debt service ratio is the ratio of a country’s external debt service payments (principal + interest) to its export earnings.

Debt service payment obligations arising from outstanding external debt at the end of March are expected to follow a downward trend over the next few years, according to the status paper.

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