Treading On Thin Ice

In a mere 50-word paragraph, Finance Minister Nirmala Sitharaman indicated a shift in policy to raise sovereign debt. She stated that the government would start raising a part of its gross borrowings in external markets, in external currencies. She argued that India's sovereign external debt to GDP is among the lowest globally, at less than 5 per cent, and if the government looks at the international market, this will have a beneficial impact on the demand situation for government securities in the domestic market. She thinks this may decrowd the domestic debt market for indigenous entrepreneurs.

What she did not disclose is the fate of the economies exposed to external debt and the complications in raising such funds in foreign currency. A quick look shows Indonesia (with 36.2 per cent of GDP in external borrowings), Brazil (29.9 per cent), Argentina (51.9 per cent), Turkey (53.8 per cent) and Mexico (36.5 per cent) are finding it difficult to keep inflation in check and repay debts. That is the worry for economists in India.

"I am already asking for a rollback," says Rathin Roy, Member of the Economic Advisory Council to the Prime Minister. Economists fear more exposure to external debt, that too in foreign currency, is bound to create pressure on the current account deficit (CAD) and inflation numbers, and will lead to currency depreciation. In the last fiscal, India closed its books with CAD of 2.1 per cent of GDP. "The depreciation of currency means you would require more money to repay these loans," says Ashwani Mahajan, Co-convenor of Swadeshi Jagran Manch, a think tank of the RSS. "We will resist this." In India, inflation has been below 4 per cent since last year. In May, it breached the 3 per cent mark after dipping to 1.97 per cent in January this year. The rupee depreciated from Rs 60 a dollar in July 2014 to Rs 69 a dollar at the end of June this year. "As a nation, we have to decide if this risk is worth taking. The answer is a big no," says Mahajan.

At present, most of India's external borrowings are from long-term development funds such as Asian Development Bank, International Bank for Reconstruction and Development, International Development Association and International Fund for Agricultural Development. Nearly $23 billion comes from bilateral arrangements with other sovereigns such as France, the US, Germany, Japan and Russia.

Development funds are cheaper and have benign repayment conditions. But commercial funds in foreign currencies will require India to move towards full capital account convertibility. At present, the rupee is only partially convertible. The real risk lies in borrowing from commercial enterprises. Top officials in the finance ministry told Business Today the idea is to increase external borrowing to 8-10 per cent of GDP. India's external debt stood around $521.1 billion by the end of December last year. At present, the sovereign debt is around Rs 84 lakh crore and increased by Rs 38 lakh crore in the last six fiscals. But there is enough support for this. The stability in inflation and exchange rate will make the external debt attractive for the exchequer. "If you have to grow, you will have to tap cheaper debt in the international market," says Charan Singh, Chairman of Punjab & Sindh Bank. In her Budget, Sitharaman made a provision for expanding the debt market. With bank recapitalisation, NBFC clean-up and setting up of DFIs (for long-term finance for infrastructure) on the cards, the argument is that this will allow access to funds for the indigenous entrepreneurs.

The question is: At what price?

@anileshmahajan