India’s external debt down $2 bn amidst Covid-triggered depression

The economic crisis resulting from the pandemic has led to a sharp decline in global trade, lower commodity prices and tighter external financing conditions with varying implications for current account balances and currencies of different countries. Global merchandise trade is expected to contract by 9.2 per cent in 2020, says the Economic Survey 2020-21.

The Survey observes that the decline in India’s imports outweighed that of exports – leading to smaller trade deficit of $57.5 billion in April-December, 2020-21, compared with $125.9 billion in the corresponding period last year.

In April-December, 2020-21, India’s merchandise exports contracted by 15.7 per cent to $200.8 billion from $238.3 billion in April-December, 2019-20. This can be attributed to the petroleum, oil and lubricants (POL) exports that have contributed negatively to export performance during the period, while non-POL exports turned positive subsequently and helped in improving export performance in Q3 of 2020-21. Within non-POL exports, agriculture and allied products, drugs and pharmaceutical and ores an minerals recorded expansion, according to the Economic Survey 2020-21.

Total merchandise imports declined by 29.1 per cent to $258.3 billion during April-December2020-21 from $364.2 billion during the same period last year. The sharp decline in POL imports pulled down the overall import growth. While imports contracted sharply in Q1 of 2020-21, the pace of contraction eased in subsequent quarters, owing to the accelerated positive growth in gold and silver imports and narrowing contraction in non-POL, non-gold and silver imports. Fertilisers, vegetable oil, drugs and pharmaceuticals and computer hardware and peripherals have contributed positively to the growth of non-POL, non-gold and silver imports. Trade balance with China and the US improved as imports contracted, says the Survey.

Net receipts from export of services amounting to $41.7 billion remained stable in April-September 2020 compared with $40.5 billion in the corresponding period a year ago. Resilience of the services sector was primarily driven by software services, which accounted for 49 per cent of total services exports, the Economic Survey 2020-21 notes.

Net private transfer receipts, mainly representing remittances by Indians employed overseas, totaling $35.8 billion in H1 of FY 2020-21 declined by 6.7 per cent over the corresponding period of the previous year.

In H1 FY 2020-21, a steep contraction in merchandise imports and lower outgo for travel services led to a sharper fall in current payments (by 30.8 per cent) than current receipts (15.1 per cent), leading to a current account surplus of $34.7 billion (3.1 per cent of GDP). If the trend continues, it is expected that India will end with an annual current account surplus after a period of 17 years, the Surevey notes.

During April-October 2020, net FDI flows stood at $27.5 billion, showing a 14.8 per cent increase compared with the first seven months of the 2019-20 fiscal.These developments in current and capital account led to accretion of foreign exchange reserves that rose to an all-time high of $586.1 billion as on 8 January 2021.

As of end-September 2020, India’s external debt was placed at $556.2 billion, showing a decline of $2 billion (0.4 per cent) over the end-March 2020 level, with marginal rise in its ratio to GDP to 21.6 per cent. The debt vulnerability indicators such as the ratio of foreign exchange reserves to total and short-term debt (original and residual) and short-term debt (original maturity) to the total stock of external debt improved. 

Debt service ratio (principal repayment plus interest payment), however, increased to 9.7 per cent as of end-September 2020, compared with 6.5 per cent as of end-March 2020, reflecting lower current receipts.