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BW Businessworld

A Balancing Act

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A review of the latest balance of payments data should raise the hairs on the back of your neck. In the past five years, India's external debt has grown from $152 billion to about $327 billion. Okay, we are a fast growing economy, so that increase should not matter much.

But look at our foreign currency reserves: at about $315 billion, they accounted for 138 per cent of total external debt (about $225 billion) in March 2008. At end-September 2011, the equation is the following: debt at $327 billion, versus reserves at roughly $312 billion.

Roughly 66 per cent of that increase between 2005-06 (FY2006) and September 2011 is accounted for by private sector borrowing through external commercial borrowings or ECBs; companies took advantage of lower international interest rates compared to domestic rates; about $137 billion of that debt is due to be repaid in less than a year, mainly shorter-term trade credits.

Which creates a problem, as rolling that amount over could get more difficult given global economic conditions. Blame the current account deficit: at the end of March 2011, it amounted to $44 billion, up from $16 billion in March 2008. We are all familiar with the impact of higher oil prices (an increase of $10 per barrel adds roughly $7.5 billion to the annual import bill).

There is another contributing factor that is less apparent: our love for gold, which accounts for about $23 billion of that $44 billion current account deficit in FY2011. Most of that has been for consumption; viewed against India's worsening external debt position, all that gold will not glitter.

(This story was published in Businessworld Issue Dated 16-01-2012)

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