As an appreciating dollar worsens sovereign debt problems across Europe, there seems to be a sense of relief — even complacency — in India about the Centre’s limited reliance on foreign borrowings to finance its spending. True, India’s external debt to GDP ratio at 23 per cent is comfortable by international standards (Greece’s ratio is 175 per cent) and the sovereign share in this debt has been steadily falling. But to conclude that India is insulated from threats of a possible runaway appreciation in the dollar is to be short-sighted. While the Centre may have been frugal with its foreign currency borrowings in recent years, Corporate India has shown no such prudence. A recent Finance Ministry report reveals that while the Centre’s overseas borrowings expanded modestly, from $82 billion to $88 billion between March 2012 and September 2014, corporate borrowings vaulted from $120 to $161 billion, amounting to 8.5 per cent of GDP. This calls for regulatory vigil.

The private sector’s voracious appetite for foreign loans is a cause for concern. Indian companies seem to view both External Commercial Borrowings (ECBs) and Foreign Currency Convertible Bonds (FCCBs) as ‘cheap’ loans, but the truth is that their costs are vastly underestimated. Consider how, after going through one bout of restructuring three years ago, highly leveraged corporate groups such as Suzlon and Jaypee are currently engaged in frantic parleys to meet upcoming FCCB dues. Unhedged or partially hedged foreign loans can bloat and substantially impair a company’s balance sheet, if there are adverse exchange rate movements. Yet it is an open secret that most Indian companies like to skimp on hedging costs, preferring to adopt an optimistic view based on the rupee’s recent performance. This problem is best remedied by companies themselves. Today, managing forex fluctuations is as integral to corporate profitability as managing input costs. Company Boards therefore need to insist on better risk management practices that call for routine hedging. The other problem is that the real magnitude of foreign loan problems for Indian companies tends to be hidden from public view. Currently, companies have the leeway not to take note of exchange rate impacts in their quarterly results, and to record them directly in their balance sheets. They are also not required to create specific reserves towards loan repayments. Looming ECB or FCCB repayments can often catch investors or other stakeholders by surprise. On this score, a tightening of accounting standards for better disclosures on forex loans is required.

The recent turmoil in many currencies should be a wake-up call for Indian policymakers to maintain a closer watch on corporate foreign loan exposures. After all, even if the country’s external debt is within manageable limits, loan defaults or frequent restructuring efforts by domestic companies can do damage to India’s standing in the global credit markets. This is undesirable, all the more so when the country is looking to foreign capital to fund its infrastructure building exercise.

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