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Is India really better off on debt coverage?
Wed, 4 May Pre-Open

Europe and the US have been the critic's delight when it comes to financial prudence. Countries like Greece, Ireland, Portugal and Spain have been accused of taking the help of Wall Street bankers to window dress their debt positions. America itself is staring at an unprecedented debt burden; one that is threatening to take the economy into a tailspin.

Most Asian economies, on the other hand, are perceived to be well off thanks to their conservative central banks. The likes of China have a bulging trade surplus having accumulated billions of dollars in forex reserves. This has been the result of exporting every possible commodity to the West at cheaper rates. True, the US dollar may never add any value to China's dollar denominated investments. However, at least the nation has no worries on the import coverage and debt coverage front. Note that the import coverage refers to the number of months of imports that can be paid from reserves. The debt service coverage ratio we are referring to is the number of months for which debts can be serviced from the current receipts.

The latest economic data release by the RBI ahead of the monetary policy announcement has some interesting facts about India's status on the debt coverage front. At 72% in 2010, India's debt to GDP (gross domestic product) ratio was certainly far better than most developed nations. The likes of Japan and Greece had 2.2 times (220%) and 1.3 times (130%) their GDP as debt, respectively. But at the same time, other BRIC nations, Brazil, China and Russia had the ratio at 67%, 19% and 11% respectively. Thus India is certainly not the best placed on this count amongst its key competitors. What is worse is that the debt coverage position has been getting only worse in the recent months (see chart).

Data source: RBI Macroeconomic and Monetary Developments

The oil prices are certainly to blame for this crisis. But the fact that the Indian government has been accumulating loads of foreign debt from international agencies at higher rates is also a key cause. We only hope that India's disregard of financial prudence does not cost it heavily in the long term.

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Feb 20, 2018 11:23 AM