Topic-Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
4)External commercial borrowings have emerged in the past few years as one of the instruments preferred by Indian companies to raise debt, which comes with its own caveats. Critically analyze.(250 words)
Why this question
In India, foreign currency borrowing has grown sevenfold, from $20 billion in 2004 to $140 billion in 2014. This has generated concerns about several systemic risks, which need to be discussed in detail.
Key demand of the question.
The question wants us to Dig deep into the issue of ECB and discuss the need for ECBs, their advantages as well as disadvantages. We have to form an opinion on the overall issue after considering all its important and related aspects.
Critically analyze- Here we have to dig deep into the issue and identify and discuss about all the related and important aspects and correlate them to satisfy the key demand of the question. Based on our discussion, we have to form a personal opinion on the issue.
Structure of the answer
Introduction- write a few lines about the meaning of ECB; its forms and present some statistics highlighting that ECBs have grown at a very fast rate in India.
- Discuss the advantages of ECB. E.g tax shield; The cost of funds is usually cheaper from external sources if borrowed from economies with a lower rate of interest; financial leverage; sparing of domestic credit facilities; does not dilute the value of shareholders’ equity by adding to the number of shares outstanding; it is a way of raising capital without giving away any control etc.
- Discuss the disadvantages of ECB. E.g moral hazard- define and explain it; currency mismatch which can lead to financial crisis; bigger firms have higher chances of getting ECBs while smaller firms have less chances; spill-over effect on the economy especially the exports sector, due to sharp depreciation of INR etc.
Conclusion– based on your discussion, form a personal opinion on the issue and suggest a way-forward. E.g mention and reiterate the recommendations of Sahoo Committee, 2013 ; need for adequate hedging; Masala bonds etc.