Did you know that our external debt increased by 160% over the last 10 years ($101 B to $261 B in 2010)? Specifically, it doubled in the last 5 years. ($134 B in 2005 Vs $261 B in 2010).

When I knew this, I was worried. I understand we need more capital for progress and growth, but debt is hardly a way to do it. FDI helps, to some extent, but we have to invent ways of de-linking our growth with capital (especially, external). Because, if we do link it, that is a game we are playing to our weaknesses – not strengths.

In any case, I am debt averse. There are risks associated with spending the money we don’t have. It creates pressures and in times of difficulty, can tip a bad situation into a crisis.  Going by the East Asian Economic Crisis (and subsequent ‘contagion’), depending on short term capital and portfolio inflows is not good. Consider our recent experience, in 2005 and more recent sub prime crisis. In 2005, we had a sudden steep fall after elections, and our Sensex bounced back only because of the government intervention. (LIC intervened on behalf of government). After the sub prime crisis, during Jan – Oct 2008, Sensex fell by 50%! It is a known fact now that FIIs (Foreign Institutional Investors) are big movers in our stock market. In India, our broader economy may not be affected because of swings in Sensex but our export sector will be.

So, the crux is, we want to depend less on external capital, more specifically, external debt. So if our external debt went up by 160% is that bad? Let’s look at the data. While the debt grew, the more worrying factor is that short term debt grew. Short-term debt grew from a low of 2.8%  of total debt in 2002 to as much as 20.1% in 2010. This is not a good trend at all. It may still be ‘manageable.’ though.

Of the total growth of debt, from $98B in 2000 to $261 B in 2010, about a third is short-term. If you look into RBI report, this is due to increase in trade credit. I think this is a result of expanding trade. I am not able to comment on whether this is bad (or good!).

The other increase came from commercial borrowing (long-term) and NRI deposits. Assuming NRI deposits are safe (which could be questionable!), Commercial Borrowings + Short Term debt (Trade Credit) account for about $100 B of the $163 B increase in external debt. As of today, they both account of our 50% of our external debt and account for about 9% of our GDP. This looks reasonable if you look at it from a steady state point of view. But when crisis hits, I am not sure. I am not aware of any models/theories about how much external debt is ok. I look forward to reading some.

I am attaching the Excel file using which I studied External Debt position. This was downloaded from RBI (you should check out RBI’s ‘dataware house’.

Indian External Debt position – Nov 2010

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