India’s External Debt Surges to $717.9 Billion

As of December 2024, India’s external debt rose , reaching $717.9 billion. This marks a 10.7 per cent increase from $648.7 billion at the end of December 2023. The finance ministry’s data marks a quarter-on-quarter growth of 0.7 per cent from $712.7 billion in September 2024. The external debt to GDP ratio also saw a slight increase, standing at 19.1 per cent.

Components of External Debt

The largest segment of India’s external debt is US dollar-denominated, accounting for 54.8 per cent. The Indian Rupee follows at 30.6 per cent. Other currencies include the Japanese Yen at 6.1 per cent, Special Drawing Rights (SDR) at 4.7 per cent, and the Euro at 3 per cent. This diversified currency composition reflects India’s global financial engagements.

Valuation Effects on Debt

The increase in external debt is partly attributed to the valuation effect. The appreciation of the US dollar against the rupee and other currencies contributed approximately $12.7 billion to the debt increase in the last quarter of 2024. Without this effect, the actual increase in external debt would have been $17.9 billion.

Sectoral Distribution of Debt

By sector, the non-government sector’s debt has risen, while the central government’s external debt has decreased. Non-financial corporations constitute 36.5 per cent of the total external debt. Deposit-taking corporations (excluding the central bank) hold 27.8 per cent, followed by the central government at 22.1 per cent and other financial corporations at 8.7 per cent.

Debt Composition

Loans remain the predominant component of external debt, comprising 33.6 per cent. This is followed by currency and deposits at 23.1 per cent, trade credit and advances at 18.8 per cent, and debt securities at 16.8 per cent. This composition indicates a reliance on various forms of financing.

Debt Service Ratios

Debt service, which includes principal repayments and interest payments, accounted for 6.6 per cent of current receipts by the end of December 2024. This is a slight decrease from 6.7 per cent in September 2024, suggesting a stable debt servicing capacity despite rising debt levels.

Future Implications

The increase in external debt raises questions about sustainability and economic resilience. Monitoring the external debt levels is crucial for maintaining financial stability. Policymakers must address potential vulnerabilities arising from increased borrowing.

Questions for UPSC:

1. Discuss the implications of rising external debt on India’s economy and financial stability.
2. Critically examine the sectoral distribution of India’s external debt and its impact on economic growth.
3. Explain the concept of currency composition in external debt. How does it affect financial risk?
4. What is the significance of debt service ratios? Discuss their relevance in assessing a country’s financial health.

Answer Hints:

1. Discuss the implications of rising external debt on India’s economy and financial stability.

1. Increased external debt can lead to higher vulnerability to global financial shocks.
2. Rising debt may impact the country’s credit rating, affecting future borrowing costs.
3. It can strain foreign exchange reserves, influencing currency stability.
4. Higher debt levels can lead to increased debt servicing costs, affecting fiscal policy.
5. Monitoring and managing external debt is crucial for maintaining economic resilience.

2. Critically examine the sectoral distribution of India’s external debt and its impact on economic growth.

1. Non-financial corporations hold the largest share, indicating reliance on external financing for growth.
2. The decline in central government debt suggests a shift towards private sector borrowing.
3. Sectoral distribution reflects investment priorities and potential vulnerability in specific sectors.
4. Increased borrowing by the non-government sector may spur economic activity but raises risk levels.
5. About sectoral debt helps in formulating targeted economic policies to support growth.

3. Explain the concept of currency composition in external debt. How does it affect financial risk?

1. Currency composition refers to the different currencies in which external debt is denominated.
2. Higher US dollar-denominated debt increases exposure to exchange rate fluctuations.
3. Diversified currency composition can mitigate risks associated with any single currency depreciation.
4. Currency risk can impact debt servicing costs and overall financial stability.
5. About currency composition is essential for assessing financial risk and planning hedging strategies.

4. What is the significance of debt service ratios? Discuss their relevance in assessing a country’s financial health.

1. Debt service ratios indicate the proportion of income used for debt repayments, reflecting financial burden.
2. A lower ratio suggests better capacity to meet debt obligations, enhancing creditworthiness.
3. Monitoring changes in debt service ratios helps assess the sustainability of external debt levels.
4. High ratios can signal potential liquidity issues, affecting investor confidence.
5. Debt service ratios are critical for policymakers in evaluating fiscal health and planning interventions.