Managing the Debt Challenge

The East Asian currency crisis of the late 90s saw Russia defaulting on its sovereign obligations. A few years later, in 2001, Argentina shook the financial world when it defaulted on its external debt. In 2002, Peru and Uruguay failed to pay off their sovereign obligations. Post the global financial crisis of 2008, Greece’s credit profile weakened, leading to a default.

Every crisis has its victims, but common threads in sovereign defaults are high government debt, dependence on foreign capital and low foreign exchange reserves.

This time, too, a likely collapse of global economies post the Covid-19 outbreak will have its victims. The alarm bells are already ringing. Global rating agency Fitch has predicted record sovereign defaults in the current year.

₹ 22 Lakh crore Estimated borrowings of Centre and states in FY21 as against ₹13 lakh crore-plus in FY20

Much before the Russian sovereign default in 1997, India had narrowly escaped a crisis in the early 90s when its foreign exchange reserves were enough to cover just a few days of imports. At present, however, foreign exchange reserves are at a much comfortable level of $500 billion, which can easily cover over 10 months of imports.

But, India’s vulnerability stems from