China: A new lenders to India By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

June 11, 2015 | Posted by bobbysrinivasan << back to blog

Major Indian companies have been borrowing monies from outside India to take advantage of lower interest rates in other currencies for some time now that we carry a relatively heavy burden of external commercial borrowing exceeding US $ 200 billion. Our foreign reserves are around 350 billion US dollars and it is quite a surprise that RBI continues to allow these companies to borrow more. What could happen if we borrow beyond our capability to return? This is a concern of a student who has this conversation with his professor.

Student: Professor, I read in the papers that Bharti Airtel has received a commitment from the Chinese state lenders a loan of 2.5 billion US dollars. What exactly is the situation here? Has the Indian capital market dried up?

Professor: I also read the news. You see interest rate on loans from Chinese state banks tend to be lower linked, as they are, to export commitments from that country’s manufacturers. The Chinese banks are smart. One of the major conditions for the loan is that Bharti Airtel will buy 4G devices and the launch of TD-LTE services (Time Division – Long Term Evolution) from China. You see, the loan is given to buy equipments from China. Gujarat’s Adani Power has received similar commitments from China development bank. Jindal, Infrastructure Leasing and Financial Services (IL and FS) are also on the lookout for billions of dollars of loans from China. Slowly but steadily the Modi government is able to tap loans from our richest neighbour.

Student: I am worried whether they will all add up and come to haunt us. I read that our external liabilities is already in excess of 500 billion US $ while our current reserves are only of 350 billion US $.

Professor: The market has the ability to adjust itself. Recently Argentina had big loans to pay with interest and they defaulted and so their currency took a deep plunge in value against the dollar. Market is a self-correcting mechanism and will do what is necessary to rectify the situation.

Student: Are you then saying that our currency will get devalued like Argentina?

Professor: I am not saying that. What I am saying is the credit rating will change if we are not able to meet our bills. But on the other hand, if the borrowed money could produce goods and services which could be exported to earn the foreign exchange, it may not be a problem after all. Also look at politically, China is happy to be a trading partner to India. With years of good understanding more and more of the surplus funds could find its way into India. We are after all capital starved. Our gross domestic capital formation is dismal. Why not take the loan from China, if our economy can achieve higher rate of growth. You see long term debt generally works its way into the economy by adding high valued activities. In short, India is slowly throwing caution to the wind and is looking at its priority. We need expansion and jobs. If the Indian capital market is inadequate to fulfill our need, there is no harm looking to overseas. Besides the US dollar interest rates are incredibly low. Therefore I suggest that you alter the way you think. India needs to leap frog. Being terribly precautionary. We will miss all opportunities. If you are worried about the Indian currency value, you can always hedge yourself through several means. Any way good luck to you.

Student: Thanks professor. Mr. Modi, in the last one year has been to multiple countries looking for collaboration. When he succeeds, which he will, India will become a trading partner to 100 countries of the world. That’s all we need.

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