Get More Info
  • STOCKSELECT
  • SECTOR REPORT
  • RELATED VIEWS
  • SPECIAL REPORT
  • INTERVIEW
  • MYSTOCKS

  • Views Search

    Portfolio Tracker
  • VIEW PORTFOLIO
  • Equitymaster.com : External debt: Not the cause of concern
     
  • PRINT THIS
  • E-MAIL THIS
  • FEEDBACK
  • OUTLOOK ARENA  >>   VIEWS ON NEWS >>  APRIL 2, 2004

    External debt: Not the cause of concern
    MYSTOCKS | FREE NEWSLETTER

    Along with the GDP growth numbers that were released the day before by the CSO, another set of numbers were released by the finance ministry, and they were relating to the external debt position of the country. The ministry numbers indicate that at the end of December 2003, the total external debt of the country has risen to over US$ 112 bn from US$ 105 bn a year ago. In this article, we look at the implications of the various components of foreign debt and what is the status regarding each component.

    The main components of foreign debt as far as India is concerned are listed below in the table. The variation over a year is also listed in the table. As far as the variations are concerned, the most significant of them has been the rise in NRI deposits. Due to the relatively better interest rates offered by the Indian economy as well as a rising rupee, a lot of NRI capital has flowed into the country and this is reflected in the accretion of NRI deposits. Apart from NRI deposits, there has been accretion in the short-term debt as well as into the country.

    Components Dec-02 Dec-03 Change (%)
    Multilateral 32.6 30.6 -6.2%
    Bilateral 16.6 17.9 7.8%
    IMF 0.0 0.0  
    Export credit 5.0 4.8 -4.6%
    Commercial borrowing 22.5 20.5 -8.8%
    NRI deposits 21.8 29.0 32.6%
    Rupee debt 2.8 3.0 7.1%
    Total Long term debt 101.4 105.4 4.0%
    Short term Debt 3.8 6.7 74.7%
    Total external debt 105.2 112.1 6.5%

    While the accretion in the short-term debt position is worrying (obligation is typically within a year), India's forex reserves are comfortably high enough to cover for any immediate withdrawals. Apart from this, the overall picture of the external debt position seems quiet favorable. External debt to GDP ratio has fallen significantly over the last eight years from 30.8% in FY95 to 20.2% in Dec 2003. While external debt (i.e. money borrowed from abroad) has risen in absolute terms, the strong growth in GDP witnessed in the period between FY96 to FY98 and the growth being witnessed in the current year meant that the overall ratio has declined for the better. Due to the significant fall in debt levels (as a % of GDP), the debt service to current receipts ratio has also fallen significantly. This means that of the total receipts of the country, the debt servicing requirements of the same have fallen significantly. This means that there will be more resources to employ into more productive causes.

    If one were to classify the debt levels according to governmental and non-governmental debt, we see that the government debt as a % of GDP has fallen significantly (from 60% to 39%) in the last eight years and non-government debt has risen (from 40% to 61%) as a % of GDP. These ratios may not indicate much because this may also indicate that the government is relying on domestic borrowings more and that may be the reason for the fall in this ratio. On the other hand, higher non-governmental debt levels may indicate the increasing reliance on foreign currency borrowings to fund capital requirements.

    Overall, while the picture of India's external debt looks improved and healthy, the overall debt standing (external plus domestic) of the Indian government looks a bit shaky. Of the overall debt to GDP ratio of the government, which stands at nearly 75.5%, only 2.6% is on account of external debt. But the government continues to borrow in a large way from the domestic market. In fact, one of the key beneficiaries of the decline in interest rates in India has been the government. Efforts to contain the growing fiscal deficit like the fiscal responsibility bill have been half-hearted.

    Though the fiscal deficit scenario seems to have improved (according to the government) in FY04, its sustainability is in question here. Till now, despite higher fiscal deficit, interest rates have not witnessed any upward pressure. But once corporate investments gain momentum and demand for money increase, any increase in fiscal deficit could pressurize interest rates in the future. Today external debt may not be much of a concern, but the fiscal deficit surely is. The need for the hour is therefore, fiscal prudence. Hope the improvement in the external debt situation is a good starting point.

    Its about selecting the right stock...
    ...at the right price!

    Equitymaster follows the value-investing approach to selecting stocks for investment. Subscribe to our premium research today!

    More Views on News

    My Latest Stock Recommendation (Fast Profits Daily)

    Oct 9, 2020

    How I picked an exciting stock using trends from both the commodity and equity markets.

    Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

    Jun 1, 2020

    Is too much data hurting your quest for market beating returns?

    Quantum Mutual Fund: Hum woh nahi hain (The Honest Truth)

    Apr 29, 2020

    Ajit Dayal on how the mutual fund industry robs you of your wealth.

    This One Trigger Could Turnaround Yes Bank's Stock Price (The 5 Minute Wrapup)

    Oct 16, 2019

    If Yes Bank manages to do this, it could be the start of a much-needed turnaround for the bank.

    Gold could Hit 40,000 Sooner Than Expected (Profit Hunter)

    Aug 16, 2019

    Domestic gold prices are firing on both engines now. Gold prices could touch 40,000 faster than you could imagine.

    More Views on News

    Most Popular

    This One Smallcap Stock is a Must Have in Your Portfolio (Profit Hunter)

    Nov 11, 2020

    Investing in this smallcap could open doors of huge, long-lasting wealth.

    This Diwali Consider Richa's #1 Stock Pick for 2021 (Profit Hunter)

    Nov 13, 2020

    Why I admire the approach that Richa uses to zero in on stocks with huge upside potential.

    Should You Buy Gold Now? (Fast Profits Daily)

    Nov 11, 2020

    Pfizer has announced a vaccine for covid-19. In response, gold prices have fallen. Should you buy? Find out in this video..

    Don't Let Brokerages Fool You into Buying HUL & Nestle. The Real Money is in These Stocks Right Now... Views On News (Views On News)

    Nov 12, 2020

    Rahul Shah discusses why he preferred a little known stock over Nestle Ltd and how he was proven right.

    US Elections: Won a Battle, Now the War (The Honest Truth)

    Nov 13, 2020

    Ajit Dayal on the urgent need to fix the disparity between the rich and the poor in the US.

    More