Last fiscal the government shed the aversion to raising funds overseas in extraordinary circumstances to raise $9.4 billion. A bulk of these borrowings were for COVID and development-related projects and estimated to have funded about 3 to 4 per cent of the revised fiscal deficit for the year.
Outstanding multilateral government debt amounted to $57.7 billion as of March 2021 compared to $48.3 billion as of March 2020, translating net fresh borrowing of $9.4 billion during the fiscal. In addition, the government’s bilateral borrowing amounted $2.5 billion and another $209 million from the IMF.
“Such external financing arrangements are usually with international development agencies, including the IBRD, AIIB, ADB etc., wherein funding facilities are at concessionary rates and for longer-tenors,” said Radhika Rao India economist at DBS Bank. “Being usually tied to social development financing needs, last year’s funding increase was likely due to the pandemic” For instance total World Bank funding towards India’s social protection programs since the start of the pandemic stood at a little over $1.5bn.
Also, Asian Development Bank alone extended close to $3.92 bn funding to the Indian government for 13 specific projects, including COVID-19 relief. The projects included those related to transport, urban development, energy and public sector management.
Significantly, such loans are at a concession to the commercial rates and hence help to save interest costs. “Typically, these loans are given at concessional rates, relative to market borrowings and for long duration,” said Rahul Bajoria, India economist at Barclays Capital. ” Assuming an incremental $ 5billion new loans, at a 2% lower rate than the prevailing market rates, ceteris paribus, India could save close to $100mn in debt servicing every year throughout the term of loan”
Though a small amount in proportion to the fiscal deficit, these borrowings have partly helped fund fiscal deficit “We have funded this through Government borrowings, multilateral borrowings, Small Saving Funds and short term borrowings” Finance minister Nirmala Sitharaman said in her budget speech in February this year.
Indian government’s overseas borrowing has helped to save economy-wide interest costs. “The direct savings are to the tune of $ 100mn in interest payments every year,” said Rahul Bajoria, India economist at Barclays Capital. ” Had these funding been accessed from domestic sources, it would have pushed up the cost of government borrowing, and economy-wide interest costs.”
The increase is unlikely to be a source of concern as borrowings from multilateral, bilateral and IMF cumulatively make up less than a fifth of total external debt, compared to commercial borrowings and non-resident deposits which together account for over 60%. ” Last year’s sharp increase in the Forex reserves stock has also helped to improve the external debt coverage ratios.” Rao said.
