First, when the news item appeared on June 29, not only did the Ministry bother to stem such a gross overstatement, thereby perpetuating a wrong perception but none of the major financial or national dailies found it a great negative tidings to follow it up. But now after more than a month of absolute silence, Adviser in the Ministry of Finance had given the government’s retort, albeit admitting that ‘debt figures’ in the news story are ‘broadly reflected correctly.’ But since then, the situation on the external front—both the current account deficit and the trade deficit—turned worrisome only.

That the country’s economic slowdown for the second year in a row appears to be a reality is now given, even as the UPA government had celebrated the return of the reformer with a refurbished credentials Chidambaram and the first anniversary of his stint in the North Bloc. But whatever tepid and belated damage control the mandarins in the Finance Ministry do, the country’s central bank has not refrained from voicing its corking concerns about the economy’s continued vulnerability on the external front. In its latest first quarter monetary review of macroeconomic and monetary developments, the apex bank minced little words when it mourned that India’s external sector imbalances have persisted and brought the rupee under high pressure. Thus despite the moderation in the current account deficit (CAD) in the last quarter of 2012-13, it remained above the sustainable level. CAD, a key sign of a nation’s external vulnerability, supervenes when its total import of goods, services and transfers is greater than its exports. A widening CAD automatically exerts downward pressure on the rupee, making imports quite expensive.

A point highlighted by the RBI is that the widening CAD, financed through higher debt flows, led to a marked spurt in the country’s external debt during the inaugural year of the Twelfth Five Year Plan (2012-17). India’s external debt stood at $390 billion at end-March 2013. What is more worrisome is that there has been a sizable rise in external commercial borrowings (ECBs) and rupee-denominated non-resident Indian deposits. Corporate borrowers, keen to borrow in foreign currency to benefit from lower interest and longer terms of credit, no doubt used the ECB route to pile up billions of debt. They were also benefitted by the domestic currency appreciation when the local currency was appreciating due to surge in capital flows and the debt service liability was falling in domestic currency terms. But these benefits seem to be fast fading in the backdrop of US Federal Reserves’ proposed move to withdraw quantitative easing (QE) which would change the ultra low interest rates regime in the offshore and onshore financial markets. This would also result in Foreign Institutional Investors (FII) to withdraw their exposure in the emerging economies including India. As this is most likely to occur in the coming months, India’s capacity to seek volatile capital flows would be jeopardised at a time when the corporate borrowers too would be hard pressed to repay their soft loans on hard terms when the Indian rupee is depreciating, a sort of an unenviable double-whammy.

Short term debts, on residual maturity basis has surged by about $25 billion in 2012-13. Hence the RBI is dot on spot when it noted that in view of the rise in external debt and shortening maturities, there is a need to keep a close vigil on external debt levels and its components, particularly private corporate debt. With rising debts and deceleration in GDP growth, RBI saw heightened vulnerability in the external sector in 2012-13 compared with the previous year. India’s external debt to GDP ratio increased to 21.2 per cent at end March 2013 from 19.7 per cent at end March 2012. Besides the ratio of short term debts (both original and residual maturity) to total external debts increased further at end March 2013. The ratio of reserves to total debts worsened in 2012-13 and stood at 74.9 per cent, though this is only a theoretical threat.

Given these grim ground realities, the UPA government is betting on durable flows such as Foreign Direct Investment. It has approved a host of hike in sectoral caps in as many as 18 sectors in a bid to send a signal to overseas investors. As these measures need legislative imprimatur with Opposition parties in Parliament playing obstructionist ploys, the chances of enhanced FDI flows into these sectors could be feasible only if other criteria in these sectors including credible regulators are fulfilled. With the country in the General Election mode in the coming months, the chances of using executive route to fast track reforms might not cut ice with the discernible investors who have a long-term vision and commitment from the host country about policy stability.

In sum, despite the proactive pronouncements and reform announcements of the Finance Ministry, the odds are stacked heavily against the authorities. The least it could do is to pay due heed to institutions such as the RBI tasked with ensuring price stability financial stability so as to restore the much-needed confidence of the stakeholders of the real sectors of the economy, as also the overseas investors. (IPA Service)