India has the space to attract debt flows of another $ 90 billion (around Rs 693,000 crore) given the threshold level of the country’s external debt, says a Reserve Bank of India study.

“The empirical results suggest that as against India’s current external debt to GDP ratio of 20 per cent, the estimated threshold level is higher in the range between 23 per cent and 24 per cent of GDP, indicating space for attracting more debt flows of the order of $ 90 billion,” says the RBI study on ‘Growth maximising external debt of India’. Given the risk of amplifying external vulnerabilities because of higher exposure to external debt, the estimated space may be used carefully balancing the objective of growth and macro-stability, it said.

India’s debt market is being progressively opened up to the foreign capital in a careful and calibrated manner.

According to estimates, India’s external debt stood at $ 614.9 billion as at end-December 2022. Commercial borrowings (CBs) at $ 226.4 billion, NRI deposits at $ 141.9 billion and short-term trade credit at $ 110.5 billion, together account for about 78 per cent of the total external debt. The external debt to GDP ratio as at end-December 2021 was 20.0 per cent.

The total external debt, which fell below the pre-crisis levels in the immediate aftermath of the pandemic lockdown, crossed the pre-pandemic levels as at end-December 2020 and consolidated further helped by NRI deposits crossing pre-pandemic levels as at end-June 2020, commercial borrowings crossing the pre-pandemic levels as at end September 2021 and short-term trade credit crossing the pre-pandemic levels as at end-December 2021, the RBI said.

In contrast, India’s external debt remained relatively immune to the global financial crisis (GFC) reflecting the resilience of commercial borrowings, the most growth-sensitive and the largest component of India’s external debt. “The resilience of commercial borrowings in the wake of the GFC stemmed largely from the relatively muted impact of GFC on growth in sharp contrast to that during GLD,” the study said.

At present, a rule-based dynamic limit for outstanding stock of ECBs at 6.5 per cent of GDP is in place. As India aims at higher, sustainable and inclusive growth, the need for attracting larger external debt flows within the estimated threshold may be assessed along with other external vulnerability parameters so that the growth objective is pursued while preserving overall macro-stability, the RBI study said.

External debt, by supplementing domestic savings, can help countries grow faster. But a large stock of external debt can potentially create vulnerabilities and dent growth prospects. Since the onset of the pandemic, many countries have expanded public spending to support the recovery, which has led to a build-up of their external debt, IMF says.

NRI deposits down $ 2.87 bn in FY22

Outstanding non-resident Indian (NRI) deposits in India fell by $ 2.875 billion to $ 139.020 billion in the financial year ended March 2022 as against $ 141.895 billion a year ago, according to the latest RBI data.

India attracted only $ 3.23 billion NRI deposits in FY22 as against $ 7.36 billion a year ago. Non-resident external rupee account (NR(E)RA) witnessed a growth of $ 3.33 billion in FY22 as against $8.84 billion last year. FCNR (B) deposits declined by $ 3.55 billion in FY22.