As per the standard practice, India’s external debt statistics for the quarters ending March and June are released by the Reserve Bank of India and those for the quarters ending September and December by the Ministry of Finance, Government of India. The external debt data are released with a lag of one quarter. The external debt data in the standard format as at end-March 2013 in Rupee and US dollar and revised data for the earlier quarters are available in RBI Press Release on India’s External Debt as at end- March 2013 dated June 27, 2013. The article provides a detailed review of external debt along with the policy measures undertaken during the year.

The high current account deficit (CAD) witnessed during 2012-13 and its financing increasingly through debt flows particularly by trade credit resulted in significant rise in India’s external debt during 2012-13. As a result, the major indicators for assessing India’s external sector vulnerability deteriorated over the year.

Highlights

• India’s external debt, as at end-March 2013, was placed at US$ 390 billion (21.2 per cent of GDP) recording an increase of US$ 44.6 billion (12.9 per cent) over the end-March 2012 level on account of significant increase in short-term trade credit, external commercial borrowings (ECBs) and rupee denominated Non-resident Indian deposits.

• Excluding the valuation change (gain) due to the movement of US dollar (appreciation) against major international currencies and Indian rupee, the external debt as at end-March 2013 would have increased by US$ 55.8 billion over end-March 2012.

• In terms of major components, the share of ECBs continued to be the highest at 31.0 per cent of total external debt, followed by short term debt (24.8 per cent) and NRI deposits (18.2 per cent).

• The short-term debt increased by US$ 18.5 billion or 23.7 per cent during 2012-13 over the previous year level. There has been a distinct rise in share of trade related credits in short-term debt to around 90 per cent at end-March 2013 from around 83 per cent in the previous year. The share of short term FII investments in total short term investment, however, declined to 5.6 per cent at end-March 2013 from 12.0 per cent a year ago.

• The share of short-term debt in total debt, by original maturity, was 24.8 per cent. Based on residual maturity, short-term debt accounted for 44.2 per cent of the total external debt as at end- March 2013. Of this, the share of NRI deposits was 28.4 per cent.

• The ratio of short-term debt (residual maturity) to foreign exchange reserves at 59.0 per cent at end- March 2013 was higher compared to 50.1 per cent as at end-March 2012.

• The debt service ratio declined marginally to 5.9 per cent during 2012-13 as compared with 6.0 per cent during 2011-12.

• India’s foreign exchange reserves provided a cover of 74.9 per cent to the external debt stock at the end of March 2013 as compared with 85.2 per cent at end-March 2012.

• The US dollar denominated debt accounted for 57.2 per cent of the total external debt stock as at end-March 2013, followed by that in Indian rupee (24.0 per cent) and SDR (7.5 per cent).

1. India’s External Debt as at end-March 2013

i. India’s external debt, as at end-March 2013, was placed at US$ 390 billion (21.2 per cent of GDP) recording an increase of US$ 44.6 billion (12.9 per cent) over end-March 2012 (Table 1 & Chart 1).

ii. The increase in external debt during 2012-13 was on account of short-term trade credits, commercial borrowings, and rupee denominated NRI deposits. Large recourse to borrowings reflects increasing financing needs led by all time high current account deficit recorded during the year and continued uncertainty in global financial markets. The share of ECBs (US$ 120.9 billion) continued to be the highest at 31.0 per cent of total external debt, followed by short-term debt (24.8 per cent) and NRI deposits (18.2 per cent) (Table 2).

2. Valuation Change

i. The valuation change (gain) during 2012-13 amounted to US$ 11.3 billion reflecting the appreciation of US dollar against Indian rupee and other major currencies. Thus, excluding the valuation gain, the stock of external debt as at end-March 2013 would have increased by US$ 55.8 billion.

3. Components of External Debt

i. Almost all the major components of the external debt recorded a rise during the year except bilateral loans, borrowings from IMF, export credits and rupee debt (Table 3).

ii. ECB approvals and gross disbursements during 2012-13 were lower at US$ 32.0 billion and US$ 25.5 billion as compared to US$ 35.3 billion and US$ 28.9 billion, respectively in the preceding year. Hence, on a net basis, rise in ECBs was marginally lower than that in the preceding year. Accordingly, during 2012-13, ECBs rose by US$ 16.1 billion as compared with US$ 16.3 billion in 2011-12 (Table 3 and Table 4).¹

iii. Trade credit components of external debt (both long-term and short-term) showed an increase of US$ 20.3 billion as at end-March 2013 over end- March 2012 as compared with an increase of US$ 7.1 billion during a year ago reflecting higher level of imports financed through trade credits during 2012-13 as against a year ago.

iv. NRI deposits increased by US$ 12.2 billion to US$ 70.8 billion as at end-March 2013 over the level as at end-March 2012. The increase was primarily on account of increase in rupee denominated NRI deposits reflecting the impact of deregulation of interest rates on NRO and NRE deposits in December 2011.

v. The short-term debt increased by US$ 18.5 billion to US$ 96.7 billion as at end-March 2013 from US$ 78.2 billion as at end-March 2012 mainly on account of rise in short-term trade credit.

4. Currency Composition of India’s External Debt

i. The US dollar denominated debt continued to be the largest components of India’s external debt with a share of 57.2 per cent as at end-March 2013, followed by that in Indian rupee (24.0 per cent), SDR (7.5 per cent), Japanese Yen (6.3 per cent) and Euro (3.5 per cent) (Table 5).

5. Instrument-wise Classification of External Debt

i. The instrument-wise classification of India’s external debt across the borrower category indicates that loans accounted for 45.2 per cent of total debt outstanding as at end-March 2013 as compared with 49.0 per cent as at end-March 2012 (Table 6).

ii. On the other hand, there has been a rise in the share of ‘bonds & notes’ and ‘currency & deposits’ in India’s total external debt at end-March 2013 compared to that in the preceding year.

6. Short-term Debt

i. The short-term debt (on original maturity basis) primarily comprises trade credit, FII investment in T-bills and other instruments and borrowings of commercial banks. Trade credit continued to be the predominant component of short-term debt and witnessed a significant increase during 2012- 13 as compared to the preceding year. On the other hand, there has been a decline in outstanding FII investment in T-bills to the tune of US$ 3.9 billion during the year.

ii. The share of external liabilities of commercial banks in short-term debt declined marginally from 4.4 per cent at end-March 2012 to 4.3 per cent at end-March 2013. Similarly, the share of FII investment in T-bills and other instruments declined significantly from 12.0 per cent at end- March 2012 to 5.6 per cent at end-March 2013 mainly on account of net sales by FIIs during 2012-13. Concomitantly, the share of trade credit increased to 89.8 per cent of total short-term debt as at end-March 2013 from 83.3 per cent in the preceding year (Table 7).

7. External Debt by Residual Maturity

i. Based on residual maturity, the short-term debt accounted for 44.2 per cent of total external debt as at end-March 2013. The share of NRI deposits under short-term debt (residual maturity) was the highest at 28.4 per cent. The ratio of shortterm debt by residual maturity to foreign exchange reserves worked out to 59.0 per cent at end-March 2013 (Table 8).

8. Government and Non-Government External Debt

i. Although the level of Government (Sovereign) debt as at end-March 2013 was almost the same at end-March 2012, its share in the total external debt at 20.9 per cent at end-March 2013 was lower than that of 23.7 per cent as at end-March 2012. Concomitantly, the share of non-Government debt in total external debt increased to 79.1 per cent as at end-March 2013 from 76.3 per cent at end- March 2012 (Table 9 and Chart 2).

9. Debt Service Payments

i. India’s debt service payments amounted to US$ 31.3 billion during 2012-13 as compared to US$ 31.5 billion during 2011-12 (Table 10).

ii. Lower repayments towards ECBs coupled with increase in current receipts led to a marginal decline in the debt service ratio to 5.9 per cent during 2012-13 from 6.0 per cent in 2011-12. The upward trend in interest payment, however, continued during 2012-13 and comprised 34.9 per cent of total debt servicing as compared with a 27.1 per cent during preceding year reflecting higher stock of total debt and hardening of interest rate in the international financial market. The servicing of ECBs during 2012-13 accounted for 74.2 per cent of the total debt service as against 80.0 per cent during 2011-12, reflecting lower principal repayment of ECBs.

10. Key Indicators of India’s External Debt

i. With rise in stock of debt and fall in foreign currency assets, the key indicators of external debt such as debt-GDP ratio, ratio of foreign exchange reserves to total debt and short-term debt as per cent to total debt as well as foreign exchange reserves showed worsening trend in 2012-13 (Table 11). However, debt service ratio improved mainly on account of higher level of current receipts. In comparison with top 20 indebted countries (based on year 2011), India continues to be among the less vulnerable countries (Table 12).

External Debt Management in India

The external debt policy of India continues to regulate the levels of commercial borrowings and their end-use, rationalising the interest rates on NRI deposits, and monitoring short-term debt. In terms of hierarchy, long-term flows are preferable to short-term. ECB flows under both the automatic and approval routes are moderated by interest rate ceilings and those under the automatic route are governed by a ceiling on total quantity as well. There is also a ceiling on FII investment in sovereign and corporate debt. In view of the widening CAD during 2012-13, various policy measures have been undertaken to facilitate foreign capital flows to India, particularly debt flows for smooth financing of CAD.

Recent Policy Developments

External Commercial Borrowings and Trade Credits

Taking into account the financing requirements of the corporate sector and prevailing liquidity conditions in the domestic and international financial markets, the Ministry of Finance, Government of India in consultation with the Reserve Bank of India, regularly reviews the policy stance on ECBs and trade credit and introduce various policy measures. The principal elements of policy for ECBs include keeping the maturities long, costs low and encouraging investments in infrastructure and export sectors. ECBs by corporates are permitted through automatic route and approval routes. Proposals that meet minimum criterion are permitted under the automatic route and other cases fall under the approval route is considered by an empowered Committee of the Reserve Bank.

May 2012

The interest rate on export credit in foreign currency was deregulated by allowing banks to freely determine their interest rates on such credit.

June 2012

Indian companies in manufacturing and infrastructure sector and having foreign exchange earnings have been allowed to avail ECBs for repayment of outstanding Rupee loans towards capital expenditure and/or fresh Rupee capital expenditure under the approval route with an overall ceiling of US$ 10 billion for such ECBs.

September 2012

Companies in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on ECBs, were allowed to avail of trade credit up to a maximum period of five years for import of capital goods as classified by DGFT subject to certain conditions viz,. (i) the trade credit must be abinitio contracted for a period not less than 15 months and should not be in the nature of short-term roll over and (ii) AD banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU)/Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years. On review on December 14, 2012, it was decided to further relax the condition of ‘abinitio’ buyers’ credit from 15 months to six months for existing trade credit. However, the condition regarding ‘abinitio’ buyers’ credit for 15 months shall continue for future trade credit.

ECBs were allowed for low cost affordable housing projects as a permissible end-use, under the approval route. Under this scheme, ECBs could be availed of by developers/builders for low cost affordable housing projects. Housing Finance Companies (HFCs)/National Housing Bank (NHB) can also take recourse to ECBs for financing prospective owners of low cost affordable housing units. These guidelines were reviewed and modified in June 2013.

In order to ease financing of domestic companies, the Government announced a reduction in the withholding tax from 20 per cent to 5 per cent on ECBs by Indian companies which will be applicable for a period of three years, i.e., from July 1, 2012 to June 30, 2015 for foreign loans or long-term infrastructure bonds to be raised during this period.

November 2012

SIDBI was included among the eligible borrowers for availing of ECBs for on-lending to MSME sector.

December 2012

Recognising the difficulties of domestic importers in raising trade credit within the existing all-in-cost ceiling, the Reserve Bank had revised the all-in-cost ceiling from 200 basis points (bps) over six month LIBOR to 350 bps over six month LIBOR on November 15, 2011. After periodic reviews, it was decided that all-in-cost ceiling would continue to be applicable till September 30, 2013 and is subject to review thereafter.

June 2013

It was decided that the scheme of availing of ECBs for working capital for civil aviation sector will continue till December 31, 2013. Considering the developments in the global financial markets, it was decided that the existing scheme of Buyback/ Prepayment of FCCBs under the approval route which expired on March 31, 2013 may be continued till December 31, 2013.

July 2013

ADs were advised that for availment of trade credit, the period of trade credit should be linked to the operating cycle and trade transaction.

Non-Resident Deposits

In May 2012, interest rate ceiling on Foreign Currency Non-Resident [FCNR (B)] deposits of banks was raised from 125 basis points above the corresponding LIBOR/Swap rates to 200 bps for maturity period of one year to less than three years, and to 300 bps for maturity period of three to five years. However, in August 2013, interest rate ceiling on FCNR(B) deposits with maturity period of three to five years was raised to LIBOR/SWAP plus 400 basis points.

Foreign Institutional Investors

To make the debt segments more attractive, all the investor classes were made eligible to invest within the overall limit without any restriction on lock-in period and residual maturity. The limit for investment by FIIs and long term investors registered with SEBI in Government securities including Treasury Bills were enhanced to US$ 30 bn. Investments in Treasury Bills were permitted up to US$ 5.5 billion within the overall limit of US$ 30 bn. Further, long term investors registered with SEBI – Sovereign Wealth Funds (SWFs), Multilateral Agencies, Pension/Insurance/Endowment Funds, Foreign Central Banks have been allowed to invest in Government dated securities up to limit of US$ 5 billion with the overall limit of US$ 30 billion with effect from June 12, 2013. The limit for FII investment in corporate debt has been raised to US$ 51 billion, out of which investments in Commercial paper is permitted up to US$ 3.5 billion.

11. Cross Country Comparison among Top 20 Indebted Countries

i. According to the latest data available on Global Development Finance Online Database, World Bank, the international comparison of external debt of the twenty most indebted countries indicates that India continues to be the fourth most indebted country in 2011 (Table 12).

ii. The element of concessionality in India’s external debt portfolio was the fifth highest after Pakistan, Vietnam, Indonesia and Philippines.

iii. India’s debt service ratio was sixth lowest after Vietnam, China, Thailand, Malaysia and South Africa.

iv. India’s position with respect to short term debt to total external debt was eighth highest with Pakistan having the lowest ratio and China the highest ratio of short-term debt to total external debt. In terms of short-term debt to reserves. India’s position was sixth lowest as Pakistan, Russian Federation, China, Brazil and the Philippines had lower ratios than India.

^* Prepared in the Division of International Trade & Finance, Department of Economic and Policy Research.

¹ ECBs in external debt include commercial bank loans, securitised borrowings and FII investments in debt funds (public and private) and hence may not be comparable with net ECBs flows reported under Balance of Payments.