The Indian economy has performed well on several fronts. It has been a bumpy ride though for an economy beset by several problems and hurdles. Today, a sanguine finance minister promises to do his utmost best to gear India into the new millennium and work towards achieving the high GDP target of eight per cent. But, first of all he has the indomitable task of tackling a rising fiscal deficit.These are some of the economic priorities before the finance minister. It appears that the issue of rising external debt has been put on the backburner right now.
But this should not be the case. For, the country's external debt of US $99 billion is by no means a negligible amount specially when compared with some other emerging economies that have their external debt levels under control.
In the past decade, debt stocks had peaked. But that is not a matter of great concern. What bothers is the exchange rate. For, a country's debt is a function of the exchange rate which either pushes up or down the value of the country's debt stock.
India is likely to fall into a debt trap with Rupee devaluation at higher levels and high interest rates. And the finance minister is busy tackling other problems. Consider the prevailing situation: exporters’ interest rates are protected amidst a weak Rupee. This has resulted in a heavy debt burden. A balanced approach is missing.
It is then imperative for India to learn a lesson or two from the Mexican crisis. Globally, attention is being drawn to the composition of debt today. Monetary analysts strongly believe that hot money flows, which are destabilising in nature, were responsible for the Mexican and other crises.
India should take note of such observations. For the past two to three years, FDI, which is more stable and long-term in nature, has been on a downtrend and portfolio investments have been on the rise. This is not healthy. It could, in the long run, precipitate a severe economic crisis. And the Indian economy is just about crawling out of recessionary conditions that lasted for three years.
However, in relative terms India's debt has been under control with the share of short-term debt in total debt falling steadily. It was in the past that this indicator was worrisome. Also, with India achieving a stable GDP growth, external debt does not seem to be too worrisome a factor.
When compared to other emerging countries, India is far better off as it has a stable GDP growth at an average of around seven per cent per annum. With the government’s added focus on controlling internal debt, the government is not worried about the external front. The US $99 billion looks big but most of the debt will be disbursed off this year. The remaining debt is concessional in nature and does not carry with it such a heavy burden. The government should not ignore the external debt problem as it could get worrisome in the future, if micro indicators such as GDP and exports do not perform well. The government should try and utilise the unused component of debt which today is a hot topic of debate in international circles with international institutions doubting about sanctioning loans in the future.
India’s structure of debt has undergone a vast improvement as the reform process has reflected in the internal growth indicators which have improved qualitatively. India should try and continue this trend so that we can have a healthier external environment.