FDI: FDI is investment and without any liability while debt is creating liability of paying it back.
vs
External Debt : Gross external debt includes debt incurred by both the Government and the private sector(s) of the economy.
External borrowings can be Sovereign as well as Non sovereign borrowings. Apart from typical borrowings, Valuation loss due to the change in exchange rate of the US dollar vis-à-vis Indian rupee and major currencies such as Euro, SDR and Pound Sterling is also taken into account. Further external debt can be either :
National /Sovereign External Debt : Debt taken by the governments.
Non sovereign debt: Debt taken by the private companies. It can be in the form of :
- External Commercial borrowings (ECB)
- NRIs deposits,
- short-term trade credit
NON Sovereign Debt :
Firms can access foreign borrowing primarily
through two routes: Trade Credit and ECB.
External Commercial borrowings (CBs):
- Borrowing of funds by Indian companies from foreign sources in the form of loans, bonds, or other financial instruments .
- Maturity period for ECB is greater than three years.
- ECB can be used to finance the business related activities like expansion of business, the acquisition of assets, and the repayment of existing debt.
- ECB can be obtained from foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
- ECB can be in the form of rupee-denominated loans or foreign currency-denominated loans.
- ECB is regulated by the Reserve Bank of India (RBI), which sets borrowing limits .
- ECB facilitates access to a wider pool of capital, diversification of funding sources, and potentially lower cost of borrowing, access of technology with loans .
- As a downside of ECB, it exposes companies to exchange rate risk, as fluctuations in the value of the Indian rupee against foreign currencies can affect the cost of repaying the loan.
ECB’s can be either through approval or automatic route:
Automatic route: If a company passes all the prescribed norms specified by
the government, it can raise money without any prior approval.
Approval route: For specific sectors, the borrowers have to take the
permission of the government before borrowing through ECB.
Trade credit:
- Credit provided by supplier /any financial institution to the importer for a period of 30,60 or 90 days .
- As per this agreement between both parties, importer/buyer make purchases without payment of any upfront cash.
- The buyer makes payment at a later date but not after the agreed one.
