India's External Debt: How Much is Too Much?

The downgrading of America's debt ceiling created a wave of insecurity among other nations. The S&P rating agency may have rated wrong but the impact resulted in the collapse of the U.S. market. While U.S. is astonished at its astronomical domestic debt and European countries with their innumerable loans within the country, India also measures its debt mountain. The outcome is not only bad, but is alarming.

India's swelling debt ratio signals worsening external economy. It is like a person's cholesterol level. You know that the level is rising but don't know whether there will be a heart attack or not. Considering the Asia-Pacific region, India ranks the highest in the firing line for excessively indebted according to an analysis by Cornell economist Easwar Prasad in the Financial Times.

The analysis suggests that though India?s gross public debt to GDP ratio declined from 75.8 percent to 66.2 percent between 2007 and 2011, it still is among the highest in the region.The Global Development Finance, 2011 of the World Bank, which contains external debt numbers for 2009, shows that India's position was fifth, in terms of absolute debt stock among the top 20 developing debtor countries.

India's external debt has risen continuously in the past decade.External debt surged 17.2 percent, or by $45 billion, in the last one year alone, primarily due to an increase in commercial borrowings, short-term trade credits, and bilateral and multilateral borrowings. "The increase is primarily on account of import of crude oil but capital goods have also been a cause, along with exports not increasing commensurately." said Surendra L. Rao, columnist and a former Director-General of NCAER (National Council of Applied Economic Research).

Foreign exchange reserves are much lower than our external debts. India's external debt stands at $305.9 billion, or 17.3 percent of GDP, according to the Reserve Bank of India (RBI) data. That's almost as much as the foreign reserves India has today, which is $319 billion as of July 29. The external debt increasing more than the foreign exchange is alarming. "This is definitely alarming. What is worse the foreign exchange reserves are made up of volatile funds-external borrowings, non-resident Indian deposits, foreign institutional investments, but not by stable inflows on account of balance of trade surpluses or foreign direct investment. These reserves can go away at short notice. The debt has to be brought down by stimulating exports and making consumer imports more difficult or expensive. We must do more to attract FDI and to make FII funds stay invested for longer periods." Surendra says