India's external debt is the debt owed by India to foreign creditors. This encompasses any debt the Indian Union Government, State Governments, Indian businesses, or Indian citizens have with foreign commercial banks, other governments, or international financial institutions.

Key Entities

The key entities involved in this scenario include the International Monetary Fund (IMF) and the World Bank, two global entities that frequently lend countries money. Domestic organisations also play a significant part, with the Reserve Bank of India and the Ministry of Finance being responsible for compiling and publishing the external debt data.

Data Reporting

The Reserve Bank of India publishes the figures for the first two quarters of the calendar year, and the Ministry of Finance reports the last two quarters. The Government of India releases a yearly report that gives a detailed statistical analysis of India's external debt position. However, these reports come with a lag of one quarter.

External Debt Levels

India's external debt was at US$620.7 billion in end-March 2022, signifying an increase of US$47.1 billion from end-March 2021 when the debt was US$570 billion. Compared to the level in end-March 2020, this was an increase of approximately US$11.6 billion. However, it's important to note that India's external debt-to-GDP (Gross Domestic Product) ratio saw a reduction from 21.2 per cent at the end of March 2021 to 19.9 per cent at the end of March 2022.

Foreign Currency Reserves

In addition to the external debt scenario, it's crucial to overview the country's foreign currency reserves as well. As of 5 August 2022, India's foreign currency reserves were at US$573 billion against US$619 billion as of 25 March 2022, and US$579 billion at the end of March 2021. By comparison, this was significantly higher than the reserves of over US$474 billion at the end of March 2020.

The ratio of foreign currency reserves to external debt was at 100.3% by end-March 2022. This saw a minor drop from 101.1% at end-March 2021 but was a step up from the 84.9% recorded at end-March 2020.

Understanding India's External Debt and Its Impact on Economy

India's external debt is the money that the country owes to foreign creditors. This debt composed of both public and private loans, which are originally distributed across different maturity periods. Evaluating these debts helps to assess a country's economic status and future prospects.

Defining Key Terms

Before we delve into the details, let's simplify some financial terms.

'External Debt to GDP Ratio' is a standard economic measure, expressing the country's gross external debt as a percentage of its GDP (Gross Domestic Product). It gauges the country's ability to pay off its foreign obligations.
'Debt Service Ratio' represents the proportion of a country's export incomes that is required to meet annual interest and principal payments on external debt.
'Foreign Exchange Reserves to Total Debt' ratio showcases a country's ability to manage and repay its external debt obligations.
'Concessional Debt to Total Debt' ratio denotes the proportion of a country's total debt which is borrowed under more favorable conditions than the market rates.
'Short-term Debt to Foreign Exchange Reserves' ratio reveals a country's capacity to cover its short-term debt using its foreign exchange reserves.
'Short-Term Debt to Total Debt' is the fraction of total debt that is due within one year.

Analysis of India's External Debt over Time

In 1991, India's external debt was $83.8 billion US Dollar, with the external debt to GDP ratio sitting at 28.3%. Debt service ratio was as high as 35.3% and the foreign exchange reserve to total debt ratio was just 7.0%. Almost half of the debt (45.9%) was concessional, and short-term debt made up 10.2% of total debt.

By 1996, the external debt increased slightly to $93.7 billion, and it continued to rise consistently through the years, reaching $573.7 billion in 2021.

A few notable trends emerge across these years:

The 'External Debt to GDP' ratio has generally decreased (except for some minor increases), suggesting that the growth in GDP has outweighed the growth in external debt.
The 'Debt Service Ratio' has significantly declined, indicating a favorable decrease in India's external debt service payments relative to its export earnings.
The 'Foreign Exchange Reserves to Total Debt' ratio has seen considerable growth, denoting a strengthened position of the country in meeting its foreign liabilities.
The 'Concessional Debt to Total Debt' ratio has consistently fallen, indicating a reduced reliance on cheaper debt.
The 'Short-Term Debt to Foreign Exchange Reserves' ratios have fluctuated over the period, reflecting changes in the relationship between short-term obligations and India's foreign exchange reserves.
The 'Short-Term Debt to Total Debt' ratio has also seen fluctuations, showing variations in the relative composition of short-term versus long-term debt.

The Role of Government and Regulatory Institutions

Regulating India's external debt falls primarily under the jurisdiction of the Central Bank of India (Reserve Bank of India) and the Department of Economic Affairs (DEA). The DEA, part of the Ministry of Finance, is responsible for advising on the country's external debt policy.

Various laws, regulations, and guidelines are also at play in managing India's external debt. For instance, the Foreign Exchange Management Act (FEMA) is a pivotal legislation that governs cross-border transactions and foreign investments in India.

Conclusion

India's external debt, and its management, is key to the financial stability and economic growth of the country. Over the years, India's economy has shown resilience and flexibility, largely due to effective debt regulation and fiscal management. However, continuous monitoring and prudent management of external debt obligations are essential to maintain currency stability and economic growth.

Sources: - Department of Economic Affairs (DEA), Ministry of Finance, Government of India: dea.gov.in

Overview of India's External Debt

India's external debt is an amount that the Indian government, its citizens, and businesses owe to foreign creditors. These debts are denominated in foreign currencies like the US dollar, Euro, Yen and are to be repaid in the currency in which the debt is denominated. When analyzing India's external borrowing, we classify it into two primary types- Long-term debt and Short-term debt.

Long-Term Debt

Long-term debts are those that are due to be paid back in a time frame of more than a year. The table below describes the components of the long-term debt of India:

| Component | Debt in March 2020 (in US$ billion) | Debt in March 2021 (in US$ billion) | Percentage share in March 2021 | |-----------|------------------------------------|------------------------------------|--------------------------------| | Multilateral | 59.9 | 69.7 | 12.23% | | Bilateral | 28.1 | 31.0 | 5.44% | | IMF Loans | 0.0 | 0.0 | 0.00% | | Export Credit | 7.0 | 6.5 | 1.14% | | Commercial Borrowings | 219.5 | 213.2 | 37.40% | | NRI Deposits | 130.6 | 141.9 | 24.89% | | Rupee Debt | 1.0 | 1.0 | 0.18% | | Total Long-term Debt | 451.6 | 468.9 | 82.26% |

Categories of Long-Term Debt

Multilateral debt: These are loans that India has taken from international financial institutions like the World Bank and the Asian Development Bank.
Bilateral debt: These are the loans that India has received from foreign governments directly.
IMF loans: These are funds that India has borrowed from the International Monetary Fund.
Export credit: This is the credit extended to India by foreign suppliers for the purchase of goods and services.
Commercial borrowings: These are loans that Indian companies have borrowed from foreign lenders such as international banks, buyers’ credit, suppliers’ credit, securitized instruments and ECB.
NRI deposits: These are the funds deposited by Non-Resident Indians in Indian financial institutions.
Rupee Debt: This is a small component and consists of debt instruments denominated in Indian Rupees instead of US dollars.

Breakdown of the Long Term Debt

The majority share of the long-term debt (37.4%) comes from commercial borrowings which include borrowings from various foreign entities in form of bonds, debentures, etc. NRI deposits stand second (24.89%) in fueling the long-term external debt. These deposits are made by Non-Resident Indians in various Indian banks under the NRI deposit schemes defined under the Foreign Exchange Management Act (FEMA) regulations.

Short Term Debt

Short-term debt refers to borrowings which are expected to be repaid within one year. As of March 2021, India's short-term debt amounted to 101.1 US$ billion, representing 17.74% of the total external debt.

Total External Debt

When combining both long-term and short-term borrowings, the total external debt of India as of March 2021 stood at 570.0 US$ billion.

India's governments and private institutions often rely on this foreign capital to fund several critical sectors of the economy. Monitoring external debt levels is important as overdependence on foreign capital may pose an economic risk. Therefore, understanding the structure and trend of India's external debt is crucial for the formulation of fiscal and monetary policies.

External debt of India