Private players dominate external debt growth amid economic recovery

External borrowings up 8.2% overall in FY22; private debt accounts for 60%, against 29% a year ago

As economic recovery gained momentum, private players dominated the growth in external debt of the country in financial year 2021-22 (FY22), unlike in FY21.

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

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

“As the pandemic receded and normalcy was restored with the revival of the economy, the usual dynamics of India’s external debt returned as the growth contribution of non-SED to the overall growth in [external debt] doubled as at end-March 2022 from that a year ago as growth-sensitive commercial borrowings and import-sensitive short-term trade credit expanded,” a status paper on external debt, released recently, said by the finance ministry.

The country’s external debt rose to $620.7 billion as of end-March, 2022, from $573.5 billion the previous year. Of the $47 billion rise in external debt, $28.17 billion was accounted for by private players and the rest by the government.

This was not the case in FY21. Of the $15.27 billion increase in external debt, private players accounted for $4.52 billion or 29.6 per cent, while the overwhelming majority of about $10.75 billion or over 70 per cent was borrowed by the government, showed data provided in the status paper. 

The case was different in FY20, when the SED shrank by three per cent because of a fall in foreign institutional investments in government securities. However, the private sector’s external debt had risen by 4.2 per cent.

The revival of economic activity during FY22 renewed the appetite for accessing external debt, especially by the non-financial corporations in the form of external commercial borrowings (ECBs), which constitute the major component of commercial borrowings. Further, as imports surged by 55.2 per cent during the year, the short-term trade credit, which is basically used for import finance, also increased, the status paper said.

Vulnerability ratios

The debt vulnerability indicators of the country’s external debt continued to be benign. First, external debt as a percentage of gross domestic product (GDP) fell marginally to 19.9 per cent as at end March, 2022, from 21.2 per cent a year ago. It has hovered around 20 per cent in recent years.

Second, even as short-term debt as a percentage of total external debt rose to 19.6 per cent at the end of FY22 from 17.6 per cent a year ago, it remained within prudential limits. Short-term debt rose on the back of surging imports, as cited above. In recent years, short-term debt has accounted for 17-20 per cent of the country’s total external debt. Keeping short-term debt under control is quite important as their surge had led to the East Asian crisis in the late 1990s.

Though foreign currency reserves, which act as a buffer against external sector vulnerabilities, stood lower at 97.8 per cent of external debt as at end-March 2022 than 100.6 per cent a year ago, they are sufficient in the event of an external shock.   

The debt service ratio fell significantly to 5.2 per cent during FY22 from 8.2 per cent during the previous year, reflecting buoyant current receipts and moderating external debt service payments. The debt service ratio is the ratio of a country’s external debt service payments (principal + interest) to its export earnings.

The debt service payment obligations arising out of the stock of external debt as of March end are projected to trend downwards over the coming years, the status paper said.