Debt fears over India’s decision to borrow from abroadsento
While presenting her maiden annual budget on 5 July, India’s first full-time female finance minister, Nirmala Sitharaman, indicated that her government was planning to borrow more money from abroad.
The reason, she said, was that the ratio of India’s sovereign external debt to gross domestic product (GDP) is among the lowest in the world – less than 5%.
Like most countries, India runs a fiscal deficit, which means that it spends more than it earns, and has to borrow money to make up for the difference.
In 2019-20, the government is expected to run a fiscal deficit of about $103bn (£82bn), or about 3.3% of GDP.
Typically, the government would have borrowed domestically. The problem is that the federal government is not the only one borrowing money.
India’s state governments also run their own fiscal deficits and need to borrow money in order to make up for the difference. Then there are state-owned companies which also borrow heavily.
Meanwhile, the household savings – bank deposits, insurance funds, mutual funds, currency – which finance these borrowings have been declining over the years.
This has led to a situation where interest rates remain high, despite inflation coming down and the central bank cutting its repo rate three times this year. (The repo rate is the interest rate at which the central bank lends to commercial banks).