India’s external debt continues to surge

The value is now 23.2% of GDP.

The consistent climb in the non-government debt is of great concern, which by end-Dec stands at close to 19% of GDP, accounting for bulk of the rise in total external debt.

According to a report by DBS, India’s external debt rose to USD 462bn (23.2% of GDP) in Dec14, up $16bn from end-March. Of note, valuation gains (foreign exchange changes) worth $14bn tempered the true extent of increase in the total external stock. Without these gains, external debt would have risen by $30bn, double the pace.

On the positive end, while long-term debt continues to rise, short-term debt has stabilised and now makes less than a fifth of overall debt. This along with sharp moderation in the current account deficit provides relief on the near-term gross financing requirements and keeps funding worries at bay. India’s total and non-
government external debt as a percentage of GDP are near regional averages.

DBS adds that the biggest and fastest rising component of the non-government/ private sector debt is external commercial borrowings (include bank loans, notes and bonds raised overseas etc.). Commercial borrowings now make up 37% of total debt, up from 33.5% just six month prior. While not an immediate flash point, these borrowings could come under pressure amid an unexpected dollar surge or jump in rates. Additionally, inadequate hedging coverage is also a worry. The hedge ratio for offshore borrowings declined sharply towards late-2014, with some 85% of the borrowings now exposed to currency swings, up from 50% earlier, according to the RBI.