Short cuts cannot fix external debt crisis

Reserve Bank of India’s latest report about India’s rising external debt should be a cause of worry for the government. By March 2013, India’s outstanding external debt grew by almost 13 per cent over March 2012 to reach $390 billion. Of greater concern is India’s short-term debt maturing within a year standing at $172 billion by the end of March 2013. This is bound to add to India’s vulnerability. If capital flows dry up due to some unforeseen events or NRI deposits stop, 60 per cent of the country’s forex reserves will be exhausted to pay it back by March 31, 2014.

A major contributor to the crisis is external commercial borrowings (ECBs), which account for the highest at 31.0 per cent of total external debt. The ECBs were encouraged to enable Indian corporates to meet their genuine imports costs and spur growth, but many of them may be parking money in India to earn interest on borrowed money. There is no tracking of what the money is being used for or the gap between borrowing abroad and its utilisation at home. Since the government’s liberal ECB policy has failed to spur growth, it needs a serious review. The end use of these borrowings should be scrutinised and those who use it as soft instrument of making money should be penalised.

There are no short cuts to control current account deficit. With exports stagnating or plummeting, our monthly trade deficit has risen from $ 5 billion to $ 15 billion. The government should have taken steps to make manufacturing competitive. But this has not happened despite recommendations of many committees and commissions including the one headed by V Krishnamurthy on manufacturing competitiveness. Steel companies are left without ore and power companies without fuel. The government must take steps to increase the production of coal, whose imports have multiplied five-fold in the last decade and raise the output of exportable iron ore. India should get more gas, which can fire up idle power stations.