External Debt of India, Meaning, Significance, Impact

External Debt of India, Meaning, Impact, Significance

External debt of India refers to the total amount of money that India owes to foreign lenders, including both long-term and short-term debt. Read about it in this article.

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External Debt of India

India’s External Debt has become a critical subject of analysis and concern in recent years, as the country’s economic landscape continues to evolve. As one of the world’s fastest-growing major economies, India has experienced significant changes in its external debt dynamics, shaping its financial position on the global stage. This article aims to provide a comprehensive overview of the External Debt of India and understand related terms and trends.

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External Debt Meaning

External debt refers to the money that borrowers in a country owe to foreign lenders. It can be denominated in either the country’s local currency or a foreign currency, with a majority of India’s external debt being linked to the U.S. dollar. The external debt profile in India is categorized into three main types: External Commercial Borrowing, Currency Convertible Bonds, and Government borrowing.

Read about: Capital Account Convertibility

India’s External Debt

Here’s an overview of India’s external debt based on the available data and the 28th edition of the Status Report on India’s External Debt 2021-22.

Overall External Debt

India’s external debt grew by 8.2% to reach US$ 620.7 billion at the end of March 2022, compared to US$ 573.7 billion in March 2021.
The debt denominated in US dollars accounted for 53.2% of the total, while Indian rupee-denominated debt constituted 31.2%.
External debt as a ratio to GDP slightly decreased to 19.9% in March 2022 from 21.2% in the previous year.
Foreign currency reserves as a ratio to external debt decreased to 97.8% in March 2022, down from 100.6% in the previous year.

Composition of External Debt

Long-term debt accounted for the largest share of 80.4%, amounting to US$ 499.1 billion.
Short-term debt accounted for 19.6% of the total, with a value of US$ 121.7 billion. The majority of short-term trade credit (96%) was used for financing imports.
Commercial borrowings, NRI Deposits, short-term trade credit, and multilateral loans collectively constituted 90% of the total external debt.

Sovereign and Non-sovereign External Debt

Sovereign external debt (SED) increased by 17.1% to reach US$ 130.7 billion in March 2022.
Non-sovereign external debt grew by 6.1% to reach US$ 490.0 billion in the same period.
Non-sovereign debt was primarily composed of commercial borrowings, NRI deposits, and short-term trade credit, accounting for about 95% of the total.

Debt Service and Vulnerability

The debt service ratio declined to 5.2% in 2021-22 from 8.2% in the previous year, primarily due to increased current receipts and a decrease in debt service payments.
India’s external debt sustainability was relatively better compared to low-and-middle-income countries (LMICs) as a group and many individual countries within that group.
In terms of global ranking, India’s external debt stood at the 23rd position.

Read about: Foreign Contribution Regulation Act

Difference Between External Debt and Internal Debt

Here is a tabulated representation of the difference between External Debt and Internal Debt. These differences are generally applicable, the specific characteristics of external and internal debt can vary between countries and their respective financial systems.

External Debt	Internal Debt
Owed to foreign lenders or entities outside the country.	Owed to domestic lenders or entities within the country.
Denominated in a foreign currency or the borrower’s local currency.	Denominated in the borrower’s local currency.
Borrowed from international financial institutions, foreign governments, or private lenders outside the country.	Borrowed from domestic financial institutions, government agencies, or individuals within the country.
Subject to international market conditions and exchange rate fluctuations.	Subject to domestic market conditions and interest rates set by the country’s central bank.
Repayment is often required in foreign currency, requiring conversion from the borrower’s local currency.	Repayment is made in the borrower’s local currency.
Can have an impact on a country’s balance of payments and foreign exchange reserves.	Can have implications for a country’s fiscal policy and domestic borrowing costs.
Typically used to finance imports, infrastructure projects, or other capital investments.	Generally used to manage domestic fiscal deficits, fund government programs, or provide liquidity in the local economy.

Read about: Foreign Direct Investment

External Debt of India in 2014 vs 2023

In 2014, India’s external debt was reported to be approximately $446 billion. Several factors contributed to the level of external debt at that time:

Borrowing for Development Projects: India had been borrowing externally to finance various development projects, including infrastructure investments, to fuel economic growth and address developmental needs.
Global Economic Conditions: The global economic environment, including interest rates and borrowing costs, influenced India’s external borrowing. Favourable borrowing conditions during that period might have contributed to increased external debt.
Attractiveness to Foreign Investors: India’s growing economy and market potential made it an attractive destination for foreign investors. This inflow of foreign investment could have resulted in increased external debt.

India’s external debt stood at around $620.7 billion as of end-March 2022. Several factors may have contributed to changes in India’s external debt over this period:

Economic Growth and Financing Needs: India’s continued economic growth and development ambitions have necessitated external borrowing to fund infrastructure projects, promote industrial growth, and address fiscal requirements.
COVID-19 Pandemic: The COVID-19 pandemic and the associated economic challenges led to increased borrowing by governments worldwide, including India, to mitigate the impact of the pandemic on the economy and public health.
Exchange Rate Fluctuations: Changes in exchange rates between the Indian rupee and other currencies, particularly the U.S. dollar, can influence the value of external debt. Exchange rate fluctuations may have contributed to changes in the reported value of external debt.
Government Policies and Reforms: Policy measures and reforms implemented by the Indian government to attract foreign investment and promote economic growth could have influenced the level of external debt.
Capital Inflows and Investor Confidence: India’s efforts to attract Foreign Direct Investment (FDI) and portfolio investments could have resulted in increased external borrowing as well.

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India’s External Debt to GDP Ratio

The ratio of India’s external debt to its nominal GDP in 2022 was 20.0%, marking a decrease from the previous year’s ratio of 23.7%. This ratio is a key indicator that measures the proportion of external debtabouto the country’s overall economic output. The available data for this ratio span from March 1970 to March 2022.

Over the years, India’s external debt to GDP ratio has experienced fluctuations. It reached its highest level of 38.2% in March 1992, indicating a relatively higher dependency on external borrowing at that time. However, it also recorded a record low of 10.9% in March 1980, reflecting a comparatively lower level of external debt about the size of the economy.

Read about: GDP of Indian States

External Debt of India UPSC

Understanding India’s external debt is important for UPSC (Union Public Service Commission) aspirants as it is a relevant topic within the UPSC Syllabus. The syllabus covers various aspects of the Indian economy, including economic policies, finance, and international trade. External debt is a significant component of the economy and has implications for the country’s fiscal health, economic stability, and financial policies. Proficiency in this area can be enhanced through UPSC Online Coaching and UPSC Mock Test.

Read about: Tax System in India

External Debt of India FAQs

What is the external debt of India?

The external debt of India refers to the total amount of money that India owes to foreign lenders.

Which is the largest part of India's external debt?

The largest part of India's external debt is long-term debt.

Who owns most of India's external debt?

Private businesses and other non-government entities own the majority of India's external debt.

Why is India's external debt so high?

India's external debt is influenced by factors such as borrowing for development projects, global economic conditions, and attractiveness to foreign investors.