External commercial borrowings (ECBs) of India Inc in the first three quarters of the current fiscal fell by 40 per cent to $19.53 billion against $32.74 billion in the same period in FY20.

Muted credit demand, pandemic-induced economic slowdown, and absence of major investment and expansion plans by corporates are some of the reasons for the poor ECB offtake in the current fiscal.

Overseas borrowings of India Inc plunged to a 11-quarter low of $3.51 billion in the April-June quarter. With various stages of unlocking and pick up in economic activity, ECBs increased to $8.98 billion in the second quarter and $7.04 billion in the third quarter.

Slow economic activity

The Economic Survey for 2020-21 released last week said that the slowdown in the economic activity during H1 of 2020-21, among other factors, may have caused ebbing of India Inc’s appetite for external commercial borrowings (ECBs).

“The ongoing Covid-19 pandemic is expected to adversely impact export earnings of external commercial borrowers.

“To the extent such earnings are dented, their repayment capacity would potentially get adversely impacted, thereby creating a source of potential vulnerability going forward,” the survey said.

On the capital / financial account of balance of payments (BoP), the survey revealed that net capital flows of $16.5 billion H1 FY21 was modest compared to a flow of $40 billion in the first half of the previous fiscal.

The reduction in net capital flow, the survey said, was mainly an account of net repayments of ECBs and decline in banking capital. Among various forms of capital flows, banking capital recorded a net outflow of $8.9 billion in H1 FY21 (against net outflow of $5.7 billion in the first half of FY20).

“With repayments exceeding fresh disbursals, net outflows on ECBs increased to $5.7 billion in April-September, 2020,” the survey said.

Consequent to higher repayments over fresh borrowings and decline in banking capital, India’s external debt, as of September 2020, stood at $ 556.2 billion, recording a decrease of $2.0 billion (0.4 per cent) over March 2020 levels. “Excluding the valuation loss due to the depreciation of the US dollar vis-à-vis major currencies, the decrease in external debt would have been $8.3 billion,” the survey said.

According to the survey, ECBs – the largest component of external debt – at $207 billion as of September 2020, contracted by 5.8 per cent over the level recorded at March-end 2020.

A preferred route

ECBs have been one of the preferred routes of fund raising for India Inc in the last few years.

Citing several economic reports, the survey said that both country-specific idiosyncratic (push) factors as well as generic and global (pull) factors as drivers of ECBs in the Indian context.

The country-specific factors include domestic real economic activity, exchange rate, interest rate and inflation, status of domestic corporate bond market, degree of openness in terms of capital account and the regulatory framework.

Global financial conditions, including interest rates, global growth and inflation are among the pull factors.

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