The pre-Budget Economic Survey has cautioned against greater vulnerability of the Indian economy to global shocks and called for economic re-balancing to counter them and help in reducing the risks.
The Survey said that the country cannot afford to take the external environment for granted as it is exposed to shifts in risk tolerance of global investors. “Globalisation of Indian economy has helped raise growth; it has also meant greater vulnerability to external shocks. A focus on domestic macroeconomic re-balancing will help reduce vulnerability,” the Survey said to give an indication of a likely shift in this regard in the Budget for 2013-14 by way of steps towards fiscal consolidation and inflation containment.
Holding out a warning to the authorities that support to the Indian growth process from the global economic environment was unlikely to be significant in the years ahead, the Survey said: India cannot take the external environment for granted, and has to move quickly to restore domestic balance…The government is committed to fiscal consolidation. This along with demand compression and augmented agricultural production should lead to lower inflation, giving the RBI the requisite flexibility to reduce policy rates.”
Global economic recovery, the Survey noted, would depend on risks managed from the U.S. fiscal adjustment and eurozone area. The scenario in the West is not too optimistic as the crisis in the eurozone has become deep, structural and multifaceted despite several rescue packages over the last two years and poses a major downside risk to the global outlook.
In such a gloomy environment, the Survey has asked the government and monetary authorities to take adequate care while granting permission to corporate entities to raise overseas debts by way of ECBs (external commercial borrowings) as depreciation in the value of the rupee could create repayment woes for such borrowers.
“Regulators will have to be careful about the tendency of some Indian corporations or entities without substantial foreign exchange earnings to leave foreign exchange borrowings un-hedged, so as to get ‘cheap’ foreign financing...Low un-hedged foreign interest rates can be deceptively enticing, leaving the borrower exposed to significantly higher repayments if the rupee depreciates unexpectedly,” the Survey said.
In recent times, a number of companies have been approaching the Reserve Bank of India (RBI) to raise overseas debt as interest rates are low abroad. During April-September 2012-13, corporates have raised $1.7 billion through the ECB route, which is markedly lower than the $8.4 billion mopped up in the like period a year ago.
However, even as the country’s foreign exchange reserves at the end of January this fiscal stands pegged at $295.60 billion, up from $294.4 billion in March last year, the total external debt amounted to $283.9 billion at end September, 2012.