Covid hit private sector’s overseas borrowing
Covid-induced lockdowns resulted in muted growth of overseas debt by private players, while the borrowings by the government rose by a higher rate during 2020-21.
However, the absolute amount of private sector’s debt continued to remain much higher than the sovereign borrowings as on March 31, 2021.
Total external debt of the country rose by 2.1 per cent to $570 billion as at March end, 2021, against $558.4 billion a year ago. Of the $11.6 billion rise, around $5.2 billion was accounted for by private players and $6.3 billion by the government, showed a status paper on external debt released by the Department of Economic Affairs (DEA).
Non-sovereign debt posted a mild growth of 1.1 per cent to $462.8 billion, while sovereign debt increased by 6.2 per cent to $107.2 as at end March, 2021.
Given its relative size, typically in a normal year, it is the relative rise in non-sovereign debt that influences the dynamics of India’s external debt. It supplements domestic savings to fund larger investments as the economy expands, said the paper, put out by DEA, under the finance ministry.
“On the contrary, in a pandemic year, it is the relative rise in sovereign debt that accounted for a larger share in the overall growth of foreign debt,” it said.
Over the years, policy on external debt has enabled the private sector to access foreign debt in a calibrated manner. As at endmarch 2021, the level of non-sovereign debt was more than four times that of sovereign debt. This is compared to half as at end-march 1991, which was the period that was a few months away from the bold economic reforms initiated by the then finance minister Manmohan Singh.
Foreign portfolio investments in government securities shrunk to $16 billion as at end-march 2021 from $21.6 billion a year ago. However, the increase in the stock of external assistance to $84.6 billion from $72.7 billion during the same period more than compensated for the continued fall in the stock of FPI investment in G Sec. This increase in the external assistance was due to enhanced disbursements of Covid-19 loans from multilateral agencies, the DEA said. On the other hand, external commercial borrowings (ECBS), which account for 43 per cent of total non-sovereign debt, slid by 0.4 per cent to $197 billion as at end-march 2021, showed the paper.
Devendra Pant, chief economist at India Ratings, said tepid growth of external borrowings by the corporate sector during FY21 is mainly due to a weak investment scenario in the economy.
“Domestic demand in the economy had collapsed due to Covid and this was reflected in investment in the economy. Large idle capacity, weak demand and surplus rupee liquidity were the major reasons for low ECB by the private sector,” he said.
However, characteristic features of India’s external debt remained intact even in a pandemic year. The long-term debt constituted 82.3 per cent of the total, while the rest of 17.7 per cent was short-term in maturity.
Higher portions of short-term debt than long term-borrowings in the external debt can lead to external shocks as had happened in the time of the Southeast Asian crisis in late 1990s. In this respect, India is in a comfortable position.
Other debt vulnerability indicators also continued to be benign. The debt service ratio rose to 8.2 per cent during 2020-21 from 6.6 per cent during the previous year. This is mainly on account of, apart from lower current receipts, debt restructuring undertaken by leading non-financial corporations. The debt service payment obligations arising out of the stock of external debt as at endmarch 2021 are projected to be moderate. A country’s debt service ratio measures the amount of debt interest payments to the country’s export earnings.