India’s external debt was a little just over $100 billion in 2004; by March 2013, this had grown to $390 billion. More worryingly, the short term debt payable within a year, an indicator of immediate vulnerability, has ballooned to $172 billion in 2013, from $54 billion in 2008. Consequently, India has to pay back $172 billion to foreign lenders by March 2014. This is nearly 60 per cent of its current foreign exchange reserves. In normal circumstances, this commitment would not appear so daunting but then circumstances are anything but normal. First, the reason India has accumulated such a huge short term debt stock is that cheap money at virtually zero interest rate was supplied in abundance by western central banks, especially the U.S. Federal Reserve, post 2008. Of course, the developed world followed an easy liquidity policy to save their own economies, threatened by the worst recession since the Great Depression. But many emerging market economies ended up walking into what can only be described as a “cheap money trap.”

But such cheap money has made many emerging economies complacent about receiving inward capital flows without creating the necessary policy framework to strengthen the sinews of their domestic industry. In the four years after 2008, India’s own experience has been one of losing its export competitiveness relative to other developing countries. This has decelerated our export earnings. Added to this is our mounting import bill, largely led by rising oil prices. The massive increase in gold imports further added to our woes. The double whammy of decelerating exports and rising imports has resulted in India becoming one of the highest current account deficit nations, at nearly 5 per cent of GDP annually. India needs at least $90 billion of fresh capital inflows a year to meet its current account deficit. It could become particularly vulnerable if the U.S. Federal Reserve decides to partially roll back its cheap money policy in the months ahead. Cheap global money, which had enabled Indian corporates and financial institutions to accumulate more and more debt, will certainly not continue for long. India must begin to prepare for such a contingency. The only way out of this predicament is for the Manmohan Singh government to build a consensus among political parties to rebuild the economy on a war footing. But with general elections less than a year away, the UPA lacks the political capital to make such a determined effort to arrest the current economic slide.