By Suranjana Roy
According to a recent report by UBS Investment Bank, the external economic position of India still remains vulnerable, as its external debts increased between the financial years (FY) 2012-13 and 2017-18. Despite this position, the report assures macro level stability. Tanvee Gupta Jain, an economist at UBS Securities India, stated in her report, “Our analysis indicates that while India remains vulnerable in its external position and risks are rising on the margin, they do not pose any concerns regarding macro stability yet and are quite manageable.”
High external debts and robust forex reserves
India’s external indicators have been ‘stretchy’, as suggested by the report. While external debt increased by USD 86 billion in the stated period, foreign-exchange reserves rose by USD 108 billion during the same period. External debt refers to money borrowed from a source outside the country, such as a foreign country or other international institutions like the World Bank or the International Monetary Fund. Foreign-exchange reserves are assets held by the central banks in terms of foreign currencies, used to back their liabilities such as making international payments or maintaining exchange rates. Thus, an increase in both external debt and forex reserves is indicative of an external buffer being created.
Mounting risks over CAD
The report also states that India’s Current Account Deficit (CAD) doubled from 0.7 percent of the Gross Domestic Product (GDP) in FY17 to 1.4 percent of the GDP in FY18. CAD measures a country’s trade, where the value of imports exceeds the value of exports. “We expect this deterioration in CAD to be sustained in FY19, albeit at a slower pace than last year. We forecast the CAD at 1.8 percent of the GDP in FY19,” added Tanvee Gupta Jain.
Explaining the CAD deterioration, the report said that rising prices of crude oil, as well as that of non-oil commodities, would continue to weigh down India’s fiscal position. “Based on our analysis, the threshold CAD level for India is around 2.2-2.4 percent of the GDP, assuming a potential GDP growth of 7-8 percent with real annual import growth following its trend of the recent past along with net external liabilities and foreign exchange reserves as a ratio of nominal GDP remaining largely steady,” UBS noted, adding to a similar study done by the Reserve Bank of India (RBI) which estimated the sustainable CAD to be around 2.4-2.8 percent.
Value of the Indian Rupee to be range-bound
Among the last takeaways of the report, it predicts the Indian Rupee to remain range-bound between 63-67 over the next few months. “We estimate the Rupee at 64 by the end of FY19 and 65.5 by end of FY20. Even as we believe that there is a depreciation pressure on the Indian Rupee due to rising external risks, it should be offset by a weak USD,” UBS noted.
Given the situation, there is always scope for improvement. There cannot be room for complacency and prudent policies of debt management, as the government is required to reduce the aforementioned risks. Frequent fiscal slippages would lead to a highly unstable economy, plagued by the uncertainties arising due to trade wars and growing undercurrents of protectionism.
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