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c. India’s External Debt Scenario
♤ India’s external debt crossed the half a trillion dollars mark to touch $529 billion in
March 2018 which is 2.4% higher than its level at end-March 2017.
♤ Primary reasons for Rise in Debt: increase in commercial borrowings, short-term debt and non-resident Indian (NRI) deposits.
♤ The increase in debt was also due to a valuation loss resulting from the depreciation of the US dollar against major currencies.
♤ Commercial borrowings rose the highest by 30% continued to be the largest component of external debt with a share of 38.2 per cent, followed by NRI deposits which rose 9.3 per cent and accounted for 23.8 per cent of total debt.
♤ Short-term trade credit rose 14 per cent and accounted for 19.0 per cent of total debt.
♤ There are concerns over external sector with the rupee touching a new low versus the US dollar and the current account deficit more than doubling to 1.9% of GDP in March 2018.
♤ Various external debt indicators are showing signs of deterioration in debt.
o The external debt to GDP ratio stood at 20.5 per cent as at end-March 2018, higher than its level per cent at end-March 2017.
o The ratio of foreign exchange reserves to total debt increased to 80.2% in March this year from 78.5 per cent last year.
o Short-term debt on a residual maturity basis (i.e., debt obligations that include long-term debt by original maturity falling due over the next twelve months and short-term debt by original maturity) constituted 42.0 per cent of total external debt at end-March 2018 and stood at 52.3 per cent of foreign exchange reserves.
o But the debt service ratio declined marginally from 8.5 per cent in March 2017 to 7.5% in March 2018.
o With global interest rates rising following the US Fed raising its policy rates, the
debt service ratio could rise by March’19.
♤ The external debt policy of the Government of India has resulted in external debt remaining within safe and comfortable limits and in containing its rise.
♤ The external debt management policy followed by the Government of India continues to emphasize monitoring of long- and short-term debt, raising sovereign loans on concessional terms with long-term maturities, regulating ECBs through end-use and all- in-cost restrictions and rationalizing interest rates on NRI deposits.