In News:

A recent State Bank of India (SBI) report highlights the evolving trends in investment activity and the increasing importance of External Commercial Borrowings (ECBs) in financing India's economic growth. It also reflects rising private sector participation and a robust capital formation trend.

Investment Trends in India:

• Total Investment Announcements reached ?32.01 lakh crore during April–December 2024 (9MFY25), up 39% from the same period in FY24.
• The private sector accounted for 70% of investments in 9MFY25, up from 56% in FY24, indicating rising business confidence.
• Gross block of Indian corporates rose to ?106.5 lakh crore (March 2024), from ?73.94 lakh crore in March 2020—an addition of over ?8 lakh crore annually.
• Capital Work in Progress stood at ?13.63 lakh crore, reflecting ongoing infrastructure and industrial projects.
• Household Net Financial Savings (HNFS) improved to 5.3% of GDP in FY24 from 5.0% in FY23.
• Investment-to-GDP ratio improved, with:
  • Government investment at 4.1% of GDP (FY23) — highest since FY12.
  • Private corporate investment rising to 11.9% in FY23, projected to reach 12.5% in FY24.

What are External Commercial Borrowings (ECBs)?

ECBs refer to loans raised by Indian entities from foreign lenders, including commercial banks, export credit agencies, and institutional investors. These borrowings are regulated by the Reserve Bank of India (RBI) and used for purposes like capital expansion, modernization, and infrastructure development.

Current Status of ECBs (as of Sept–Nov 2024):

• Outstanding ECBs stood at $190.4 billion (Sept 2024).
  • Private sector share: 63% (~$97.6 billion).
  • Public sector share: 37% (~$55.5 billion).
• Of the total, non-Rupee and non-FDI ECBs accounted for $154.9 billion.
• ECBs registered (April–Nov 2024): $33.8 billion, mainly for capital goods import, local capex, and new projects.
• Cost of ECBs declined to:
  • 6.6% average during April–November 2024.
  • 5.8% in November 2024, down by 71 basis points from the previous month.
• Hedging practices: Private companies hedge about 74% of their ECB exposure, essential for managing currency risk.

Why Are ECBs Important for India?

• Bridging Capital Gaps: Domestic markets may not meet the capital needs of large projects.
• Lower Interest Rates: ECBs often offer cheaper financing than domestic loans.
• Infrastructure Financing: Key source of funds for sectors needing long-term investment.
• Foreign Exchange Access: Supports imports, modernization, and technology adoption.
• Private Sector Expansion: Enables firms to grow, diversify, and remain globally competitive.

Challenges and Risks:

• Currency Risk: Rupee depreciation can raise repayment costs.
• Interest Rate Risk: Linked to global rates (e.g., LIBOR/SOFR), which can rise unpredictably.
• Hedging Costs: Though necessary, hedging adds to borrowing costs.
• Global Dependency: Exposure to international financial volatility.
• Regulatory Constraints: RBI norms on end-use, maturity, and cost ceilings can reduce flexibility.
• Over-Borrowing Risk: Mismanagement can lead to unsustainable debt levels and strain forex reserves.

Clarification on ECB Liability Data:

• Some media reports mistakenly cited India’s ECB stock as $273 billion.
• The actual ECBs, as per RBI (Sept 2024), stand at $190.4 billion.
• The inflated figure includes $72 billion in FPI (Debt), which should not be classified as ECBs.

Way Forward:

• Regulatory Refinement: Simplify ECB rules for strategic sectors and long-term projects.
• Encourage Hedging: Make risk management more affordable and accessible.
• Prudent Borrowing: Promote ECBs for infrastructure, exports, and modernization rather than working capital.
• Monitoring and Oversight: Ensure transparency and prevent over-leverage.
• Strengthen Domestic Financing: To reduce overdependence on foreign borrowing.