ET View: Prudent debt levels good; active bond market better
As per the IMF’s latest figures, with private debt at 54.5% and government debt at 70.4%, total debt for India added up to about 125% of GDP in 2107. It is in sharp contrast to, say, high debt levels in China, which is estimated at 247% of GDP. Our foreign debt levels also seem at prudent levels.
India’s external debt was pegged at 20.5% of the nation’s nominal GDP for 2018; it was 20.5% in the previous year. India’s external debt as a percentage of nominal GDP data is updated annually. And the figured reached an all-time high of 37.5% in March, 1992. External debt amounted to no more than 10.7% in March, 1980. There was much imprudent recourse to external debt, particularly short-term borrowings, in the uncertain 1980s. The debt overhang, in a largely closed economy, did lead to a balance of payments crisis in 1991.
Meanwhile, world debt levels, including emerging market corporate debt, have risen hugely since the 2008 financial crisis and now stand at $182 trillion. It terms of policy, it is far more sensible to encourage foreign direct investment and the inflow of equities, rather than step up foreign debt levels.
The later kind of funds flows are highly sensitive to interest rates in the mature markets, and the ‘normalisation’ of ultra-low interest rates in the US have led to debt funds moving back. It has meant a strong dollar and weakened currencies, especially emerging market currencies, the rupee included.
High relative interest rates in India would merely encourage foreign debt funds to seek better returns here, and it is notable that the monetary policy committee of Reserve Bank of India, in its latest review, decided to hold policy interest rates steady and not indicate dearer cost of funds read higher interest rates.