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No let up to liabilities

The country’s short-term borrowings will continue to balloon for the foreseeable future

Even after Punatshangchu I is commissioned after 2016, the economy’s short term-rupee liabilities would still be around INR (Indian rupee) 40B, a draft report put together by the finance ministry indicates.

Short-term rupee liabilities include borrowings to meet consumption expenditure from commercial banks in India, with 10 percent average interest rates, and the standby credit facility from the Indian government at five percent interest rate.

The short-term rupee liability has been categorised under ‘other investments’ in the report.  It does not include loans taken to build hydropower projects.

The report says the short-term borrowings will continue to balloon until 2017.  During the forecast year, the liabilities, according to the report, tip at INR 50B in fiscal year 2016-17, and then reaches INR 40B in the next fiscal.

Projection for short-term Rupee borrowings from Indian commercial banks, Swap facility & government of India stand by credit facility (Source: MoF)

Today, rupee borrowings are at INR 17.2B.  Of this, INR 1.8B is from the State Bank of India overdraft facility, INR 10B is from GoI standby facility, and another INR 5.4B from the Saarc swap facility.

The report projects borrowings continuing to grow to reach INR 38B by 2014, INR 44B in 2015 and INR 50B in 2017 (See graph).

The economy will experience severe current account deficit during the forecast period until 2018.  During the final year of the forecast, current account deficit would have reached a negative Nu 73B.

Current account, which is one component of the balance of payments, is the difference between the country’s total exports and imports.  The other component, capital account, measures the economy’s inflows and outflows in the form of loans, grants and foreign direct investments.

A high current account deficit means the economy is importing more than exporting.

Current account and capital account constitute the overall balance of payments.  In most cases, high current account deficit is traded off by capital account, due to loans and grants received from abroad.

Economists point out that a substantial current account deficit is not necessarily a bad thing for a developing country.  Such experiences are indications that the economy is improving in terms of increasing local productivity and exports in the future.

Balance of trade projection(Source: MoF)

An example is the hydropower projects, which require huge imports in terms of man and machinery but then, once it commissions, exports will increase in the form of electricity to India.

The economy entered into a negative balance of payments for the first time this year.  It recorded a negative Nu 2.5B.

The report however projects that overall balance of payments will start improving slightly from next year, when it will be Nu 0.  In the following years, overall balance of payments will increase to Nu 0.4B, Nu 3.9B and Nu 4.1B.

The 1,200MW Punatshangchu I hydropower project will commission in 2016 and Punatshangchu II in 2017.

Punatshangchu I would be earning around INR 22.8B annually, if it is sold at INR 4 a unit.  According to a rough calculation, with the recent cost overrun, power from Punatshangchu I would have to be sold at INR 4 a unit.  It will not be commercially viable for the project to sell power below INR 4 a unit, given depreciation cost, plant life and operation and maintenance cost, and debt repayment.

The INR 93B project would be required to pay an annual debt repayment of INR 8B for the INR 56B loan taken to build the project.  The remaining INR 37B constitute grants from India.

By Nidup Gyeltshen 


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