India has to Repay 172 Billion Dollar Debt by March 2014

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India has to Repay $172 Billion Debt by March 2014

India’s Debt Burden triples in six years; outflow will deplete 60 % of forex reserve

The U.S. Federal Reserve’s hint that it could roll back its cumulative easy money policy seems to have suddenly increased India’s vulnerability to slowing capital flows in the near future.

In this context, India’s short – term debt maturing within a year would seem to be a matter of concern against the current backdrop of the declining rupee and the U.S. Fed’s possible change of stance on easy liquidity in future.

Short – term debt maturing within a year is considered by experts as a real index of a country’s vulnerability on the debt – servicing front. It is the sum of actual short – term debt with one – year maturity and longer – term debt maturing within the same year.

India’s short – term debt maturing within a year stood at $172 billion end March, 2013. This means the country will have to pay back $172 billion by 31st March, 2014. The corresponding figure in March 2008 — before the global financial meltdown that year — was just $54.7 billion.

India has accumulated a huge short – term debt with residual maturity of one year after 2008. The figure has gone up over three times largely because this period also coincided with the unprecedented widening of the current account deficit from roughly 2.5% in 2008 – 2009 to nearly 5% in 2012 – 2013. Much of this expanded CAD has been funded by debt flows.

This may turn into a vicious cycle.

More pertinently, short-term debt maturing within a year is now nearly 60% of India’s total foreign exchange reserves. In March 2008, it was only 17% of total forex reserves. This shows the actual increase in the country’s repayment vulnerability since 2008.

Theoretically, if capital flows were to dry up due to some unforeseen events and NRIs stopped renewing their deposits with India, then 60% of the country’s forex reserves may have to be deployed to pay back foreign borrowings due within a year.

A lot of the surge in external debt maturing within the next year is on account of big borrowings by Indian corporates during the boom years after 2004. Corporates became quite heady from their initial growth success and stocked up on huge external debts of 5 to 7 years maturity. The repayment clock is ticking for many of them now.

External commercial borrowings are now 31% of the country’s total external debt of $390 billion as of 31st March, 2013. Short – term debt with one year maturity is 25% of total external debt. However, total short term debt to be paid back by the end of this fiscal, which includes a lot of corporate borrowings payable by end March 2014, is 44% of the country’s external debt or $172 billion.

Corporates have managed to roll over their foreign borrowings over the past year because of the easy liquidity conditions kept by the U.S. Federal Reserve. But if the Fed’s easy liquidity stance were to reverse, there is no knowing how Indian corporates will pay back their foreign debt at a depreciated exchange rate of the rupee.

In any case, besides meeting its debt repayment obligation of $172 billion by 31 March 2014, India needs another $90 billion of net capital flows to meet its current account deficit projected at 4.7% of GDP by the Prime Minister’s Economic Advisory Council ( PMEAC ) for the coming fiscal.

The chairman of the PMEAC, C. Rangarajan, told that an otherwise manageable CAD may create a perception of vulnerability in the backdrop of the Fed’s latest stance.

The $172 billion that has to be paid back by 31st March, 2014 will no doubt add to this growing sense of unease.