Easier ECB norms: Are govt & RBI storing up problems for future by allowing more foreign debt?--ET
On March 5 this year, the Reserve Bank of India (RBI) made an interesting tweak to its policy under which it allows Indian corporatesto raise foreign currency loans in international markets. Under the norms at that time, corporates under investigation by law-enforcement agencies like the Enforcement Directorate were not allowed to raise such loans under the "automatic route' — put simply they needed the RBI nod every time.
In its March circular, the RBI did away with that restriction and allowed such companies to access the global markets, with the rider that the bank through which they were raising the loan had to inform both the RBI and the investigative agency concerned.
At a time when external finances are under strain and the rupee is sinking, the RBI and the finance ministry follow a standard playbook of measures, which gradually increase in intensity.
To encourage capital inflows, they make it easier for corporates and individuals to investmoney in the country, or require exporters who park earnings abroad to repatriate it. They also make it more difficult to take money out — witness the tightening of controls on the amounts of investment that corporates can make abroad, and that individuals can take out of the country.
ECBs, and flows of foreign debt in general, are a cornerstone of this strategy. At a time of 'global risk aversion', when investors are fleeing to safe havens, it becomes difficult to attract equity flows to a country like India, especially one with a weak currency, shaky current account, and uncertain macroeconomic outlook. Attracting investment through the ECB route becomes an instrument of choice.
Wooing Investments
Specifically, it is foreign currency loans by corporates, and encouraging investments by non-resident Indians (NRIs) into foreign currency deposits offered by Indian banks, that are the focus of attention. That's been the case this time round as well. Finance minister P Chidambaram has announced easier norms for ECBs, and more leeway to banks to offer higher rates to NRIs. It's a strategy that may be driven by necessity, and the need to get money into the country in the short term. "But such strategies are quick fixes," says DK Joshi, chief economist of Crisil, a ratings firm.
"They need to be backed by real reform." "A strategy to sustainably reduce the current account deficit — the fundamental problem — is missing and the focus remains on garnering more debt inflows to finance the current account deficit," says economist Sonal Varma of Nomura in a recent research report. "This strategy has already been tried and tested over the last few years and has resulted in the country accumulating larger external liabilities — the price of which is being paid now. More of the same is unlikely to result in a different outcome."
The government's ECB policy was heavily liberalised in 1999, which led to a burst of debt inflows from 2000 to 2001. Following this, the policy was rationalised, splitting such borrowings into two parts — those allowed under the 'automatic' route for which permission was not required, and those under the 'approval' route for which companies had to take the RBI's nod.
In its March circular, the RBI did away with that restriction and allowed such companies to access the global markets, with the rider that the bank through which they were raising the loan had to inform both the RBI and the investigative agency concerned.
At a time when external finances are under strain and the rupee is sinking, the RBI and the finance ministry follow a standard playbook of measures, which gradually increase in intensity.
To encourage capital inflows, they make it easier for corporates and individuals to investmoney in the country, or require exporters who park earnings abroad to repatriate it. They also make it more difficult to take money out — witness the tightening of controls on the amounts of investment that corporates can make abroad, and that individuals can take out of the country.
ECBs, and flows of foreign debt in general, are a cornerstone of this strategy. At a time of 'global risk aversion', when investors are fleeing to safe havens, it becomes difficult to attract equity flows to a country like India, especially one with a weak currency, shaky current account, and uncertain macroeconomic outlook. Attracting investment through the ECB route becomes an instrument of choice.
Wooing Investments
Specifically, it is foreign currency loans by corporates, and encouraging investments by non-resident Indians (NRIs) into foreign currency deposits offered by Indian banks, that are the focus of attention. That's been the case this time round as well. Finance minister P Chidambaram has announced easier norms for ECBs, and more leeway to banks to offer higher rates to NRIs. It's a strategy that may be driven by necessity, and the need to get money into the country in the short term. "But such strategies are quick fixes," says DK Joshi, chief economist of Crisil, a ratings firm.
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"They need to be backed by real reform." "A strategy to sustainably reduce the current account deficit — the fundamental problem — is missing and the focus remains on garnering more debt inflows to finance the current account deficit," says economist Sonal Varma of Nomura in a recent research report. "This strategy has already been tried and tested over the last few years and has resulted in the country accumulating larger external liabilities — the price of which is being paid now. More of the same is unlikely to result in a different outcome."
The government's ECB policy was heavily liberalised in 1999, which led to a burst of debt inflows from 2000 to 2001. Following this, the policy was rationalised, splitting such borrowings into two parts — those allowed under the 'automatic' route for which permission was not required, and those under the 'approval' route for which companies had to take the RBI's nod.
The Big Irony
Between 2002 and 2006, ECBs as a share of overall external debt actually fell from 24% to 19%. But starting from 2007, and faced with the onset of the global financial crisis, the finmin opened the flood gates — it raised the maximum rate at which companies could borrow, allowing smaller, and weaker, ones to raise funds abroad. The range of end-uses to which ECBs could be raised was also expanded. In 2011, the maximum amount of loan that could be raised under the auto route was raised to $750 mn.
As a result, the share of ECBs in overall debt rose from 19% to 31% between 2006 and 2013 (from $26 bn to $121 bn). "One of the challenges regarding ECBs is the ever increasing demand to liberalise the terms of end-use and eligibility vis-a-vis the sustainability of external debt," wrote the RBI in its annual report for 2012.
Corporate India too has an increasing incidence of highly public defaults from instruments like foreign currency convertible bonds — from Wockhardt to Suzlon. It's the forex debt binge of the last few years that has been one of the reasons for India's current weak external finances. That the government and the RBI should be relying on precisely this tool to bring dollars into the country is a huge irony.
Between 2002 and 2006, ECBs as a share of overall external debt actually fell from 24% to 19%. But starting from 2007, and faced with the onset of the global financial crisis, the finmin opened the flood gates — it raised the maximum rate at which companies could borrow, allowing smaller, and weaker, ones to raise funds abroad. The range of end-uses to which ECBs could be raised was also expanded. In 2011, the maximum amount of loan that could be raised under the auto route was raised to $750 mn.
As a result, the share of ECBs in overall debt rose from 19% to 31% between 2006 and 2013 (from $26 bn to $121 bn). "One of the challenges regarding ECBs is the ever increasing demand to liberalise the terms of end-use and eligibility vis-a-vis the sustainability of external debt," wrote the RBI in its annual report for 2012.
Corporate India too has an increasing incidence of highly public defaults from instruments like foreign currency convertible bonds — from Wockhardt to Suzlon. It's the forex debt binge of the last few years that has been one of the reasons for India's current weak external finances. That the government and the RBI should be relying on precisely this tool to bring dollars into the country is a huge irony.
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