India’s External Debt Position and Vulnerability Indicators: A Comprehensive Analysis

 

India’s External Debt Position and Vulnerability Indicators: A Comprehensive Analysis

India’s external debt has been a crucial element in understanding its economic resilience, particularly as global economic landscapes shift. By examining India’s external debt from 2015 to 2024, we can gain insights into how the country has managed its fiscal stability and responded to external financial pressures. This blog explores India’s external debt trends, the debt-to-GDP ratio, foreign exchange reserves, and short-term debt, providing a nuanced look into the country's economic health and vulnerability.

1. Overview of India’s External Debt

India’s external debt consists of borrowings owed to foreign entities. This debt can stem from various sources, including foreign investment, commercial borrowings, and government loans. External debt is often measured to gauge a country’s creditworthiness and economic stability, as it reflects the resources owed to foreign entities. For India, a careful balance in debt management has helped the nation handle economic uncertainties and sustain growth.

Between 2015 and 2024, India’s external debt has seen consistent growth, moving from $474.7 billion in 2015 to a projected $663.8 billion in 2024. While this steady increase might seem concerning at a glance, analyzing it alongside other key indicators offers a clearer picture of India’s fiscal health and debt sustainability.

Chart IV.38: Stable India’s external debt position and vulnerability indicators
	USD billion	Per cent
	External Debt (RHS)	ED to GDP	FER to TD	STED to TED
2015	474.7	23.8	72	18
2016	484.8	23.4	74.3	17.2
2017	471	19.8	78.5	18.7
2018	529.3	20.1	80.2	19.3
2019	543.1	19.9	76	20
2020	558.4	20.9	85.6	19.1
2021	573.4	21.1	100.6	17.6
2022 R	618.8	19.9	98.1	19.7
2023 PR	624.1	19	92.7	20.6
2024 P	663.8	18.7	97.4	18.5
Source: ‘External Debt of India-Quarterly and India’s External Debt-US Dollars (End March)’, Statistics, External Sector, External Debt-RBI https://cimsdbie.rbi.org.in/BOE/OpenDocument/2311211739/OpenDocument/opendoc/openDocument.jsp?logonSuccessful=true&shareId=5 Note: R-Revised, PR-Partially Revised, P-Provisional; ED–External Debt, FER-Foreign Exchange Reserves, TED–Total External Debt

 

 

 

 

 

 External Debt (USD Billion)

India’s external debt, measured in billions of USD, highlights the rising trend over the years:

• 2015: $474.7 billion
• 2018: $529.3 billion
• 2021: $573.4 billion
• 2023 (Partially Revised): $624.1 billion
• 2024 (Provisional): $663.8 billion

The increase in external debt reflects India’s expanding economic activities and growing international trade. However, it’s essential to consider that debt growth, if paired with robust economic growth, doesn’t necessarily signify fiscal distress. Instead, it can indicate that the nation is investing in infrastructure, technology, and industries to support long-term economic growth.

3. Debt-to-GDP Ratio

The debt-to-GDP ratio, a fundamental metric in assessing debt sustainability, measures how the country’s debt compares to its economic output. A lower debt-to-GDP ratio typically suggests that a country is better positioned to manage its debt, while a higher ratio can indicate potential debt overhang risks.

India’s external debt-to-GDP ratio has trended downward from 23.8% in 2015 to a projected 18.7% in 2024. This decline is notable, especially against the backdrop of rising external debt figures:

• 2015: 23.8%
• 2020: 20.9%
• 2023 (Partially Revised): 19%
• 2024 (Provisional): 18.7%

The declining debt-to-GDP ratio highlights that India’s economy has grown at a pace that outstrips its debt accumulation, suggesting that the debt burden relative to the size of the economy has reduced. This trend positions India favorably, as it shows that despite increased borrowing, the economy’s output has expanded significantly, reducing debt vulnerability.

4. Foreign Exchange Reserves (FER) to Total Debt (TD)

The foreign exchange reserves-to-total-debt (FER to TD) ratio measures the adequacy of a country’s reserves to cover its debt obligations. Higher ratios indicate greater financial resilience, as substantial reserves provide a buffer against currency fluctuations and external shocks.

India’s FER-to-TD ratio rose from 72% in 2015 to an impressive peak of 100.6% in 2021. Although it slightly declined to 97.4% in 2024 (provisional), the high ratio continues to signify robust reserves to meet external obligations. Notable data points include:

• 2015: 72%
• 2018: 80.2%
• 2021: 100.6%
• 2024 (Provisional): 97.4%

The FER-to-TD ratio indicates that India has maintained sufficient reserves to cover its external debt. This buffer has been particularly valuable during periods of global economic uncertainty, as ample reserves reduce reliance on foreign inflows and provide leverage for currency stabilization.

5. Short-Term External Debt (STED) to Total External Debt (TED)

The short-term external debt (STED) to total external debt (TED) ratio indicates the proportion of external debt due within one year. High short-term debt levels can increase a country’s vulnerability to liquidity risks, as they require prompt repayment, making the economy susceptible to market and interest rate volatility.

India’s STED-to-TED ratio has fluctuated modestly, remaining relatively stable over the years:

• 2015: 18%
• 2017: 18.7%
• 2020: 19.1%
• 2023 (Partially Revised): 20.6%
• 2024 (Provisional): 18.5%

Although the ratio has seen slight variations, India has generally maintained a stable level of short-term debt relative to total debt. The stability in this ratio shows prudence in debt management, as the government has avoided excessive accumulation of short-term obligations. This stability is particularly important in times of financial uncertainty, as it reduces the pressure on foreign reserves for immediate debt repayments.

6. Implications of External Debt Trends

India’s external debt growth over the years, coupled with a declining debt-to-GDP ratio and robust foreign reserves, paints a positive picture of debt management and economic stability. By maintaining high reserves and a low proportion of short-term debt, India has effectively minimized vulnerability to external shocks.

The resilience in India’s external debt indicators also speaks to the country’s evolving financial strategies. India’s government has taken steps to enhance domestic financial markets, attract foreign investment, and stabilize the currency, all of which contribute to debt sustainability. For instance, by encouraging foreign investment in productive sectors, India has diversified its sources of capital while keeping an eye on potential vulnerabilities related to debt repayment.

7. Challenges and Future Outlook

Despite the optimistic indicators, India faces ongoing challenges related to external debt. Global economic conditions, exchange rate fluctuations, and interest rates can impact debt costs and reserve adequacy. Furthermore, unforeseen events, such as geopolitical tensions and commodity price swings, could influence debt servicing.

Looking ahead, maintaining a balanced approach to external borrowing, enhancing domestic savings, and managing reserves prudently will be critical for India. Policies encouraging investment in infrastructure, technology, and manufacturing can continue to bolster economic growth, reducing debt relative to GDP.

Here are some discussion questions based on the analysis of India’s external debt and vulnerability indicators:

1. External Debt Growth: What factors contributed to the steady increase in India's external debt from 2015 to 2024? How might these factors impact India's debt sustainability in the future?
2. Debt-to-GDP Ratio: India’s debt-to-GDP ratio declined over the period despite an increase in total debt. What does this indicate about India’s economic growth relative to its debt accumulation? What might be some risks associated with a declining debt-to-GDP ratio?
3. Foreign Exchange Reserves: How do foreign exchange reserves provide a buffer against external shocks, and why is a high FER-to-TD ratio beneficial for a developing economy like India?
4. Short-Term Debt Vulnerability: Considering the STED-to-TED ratio has fluctuated but remained stable, what are the potential risks and benefits of managing short-term external debt at these levels?
5. Policy Implications: What fiscal or monetary policies could further strengthen India's debt sustainability and financial resilience amid global uncertainties?
6. Global Economic Impact: How might global events (e.g., changes in US interest rates, geopolitical conflicts) impact India’s ability to maintain its external debt stability? What strategies could India adopt to mitigate these impacts?
7. Future Outlook: With a projected increase in external debt by 2024, what measures should India take to ensure its debt remains manageable? How can India balance economic growth and debt sustainability?

 

8. Conclusion

India’s external debt trends from 2015 to 2024 reveal a story of stability and resilience. Despite an increase in total external debt, the country has managed to keep its debt-to-GDP ratio low, maintain strong foreign reserves, and avoid excessive reliance on short-term debt. These trends indicate a well-balanced fiscal strategy and a robust capacity to withstand economic pressures. As India continues its growth journey, careful debt management will remain a priority, allowing the country to navigate external uncertainties while fostering sustainable development.

In conclusion, India’s external debt position reflects a stable economy poised for growth with a careful eye on global risks and fiscal health. These indicators signal a promising outlook for India’s financial stability, with a foundation that supports economic resilience and sustainable development in the years to come.