India may not face euro-like situation despite high debt

INDIA is unlikely to slip into a euro-like situation despite figuring among the top debtor nations, according to a finance ministry report.

The report titled, ‘India’s external debt — a status report’ placed on the finance ministry’s website has said since India does not access international capital markets as a sovereign entity, the refinancing risk due to foreign commercial investors is at best minimal for the country.

India’s external debt rose 16.5% from $224.5 billion in FY09 to $261.5 billion in FY10, which puts India among the top 10 debtor nations in the world. However, the share of external debt in total public debt was 10.7% end March 2010, according to the official external debt figures. Bulk of India’s external public debt is from multilateral and bilateral creditors with foreign institutional investment in government securities accounting for less than 1% of the total public debt.

The composition of Central Government’s public debt shows that the bulk of sovereign debt is from domestic sources (about 89%), and external debt accounts for about 11%, most of which is from multilateral/ bilateral sources. Out of this, 13.7% is in the non-marketable debt like securities issued to National Small Savings Fund, 14-day state government Treasury bills, etc. These cannot be traded in the secondary markets, the way government bonds can. Such bonds comprising long-dated and short-term bonds are marketable or are traded by the eligible market participants, including foreign institutional investors. About 50% of the domestic debt is cornered through their investments in dated securities while insurance companies account for 22%.

Commenting on the report, Citi group economist Rohini Malkani in a note to clients has said: “Although external debt has climbed up from $84 billion in FY91, we think the overall picture is not a cause for concern. Debt sustainability indicators have all seen an improvement, which indicates low refinancing risks and the ability to meet debt commitments from forex reserves, which now stand at $285 billion.”

India’s foreign exchange reserves provided a cover of 106.7% to the external debt stock as at end-March 2010, while the share of short-term debt in total external debt was 20.1% at end-March 2010. Both are not alarmistic by popular benchmarks.

But there are concerns voiced in a section of the market about the increasing share of private players in India’s total external debt from around 40% in the first half of the 90s to over 70% now in the recent years. Both external commercial borrowings and NRI deposits have risen due to the interest rate differential between G3 and domestic rates.