India's External Debt 2022: Trends, Composition & Impact

External Debt of India: India's external debt is the cumulative financial obligations the nation holds to international lenders, including banks, foreign governments, and institutions like the IMF and World Bank. The debtors range from central and state bodies to businesses and private individuals. Understanding the nuances of India's external debt is crucial for evaluating its economic health and trajectory.

Data Publication: Both the Reserve Bank of India (RBI) and the Ministry of Finance release India's external debt data quarterly, with a one-quarter lag. Throughout the initial two quarters of the year, the RBI administers the data, while the Finance Ministry handles the latter. Annually, a detailed report on external debt statistics and their consequences is presented by the government.

Debt Statistics as of 2022: By March 2022, India's external debt stood at $620.7 billion, showing a $47.1 billion increase from the previous year's $573.7 billion. Meanwhile, the debt-to-GDP ratio improved, falling from 21.2% in 2021 to 19.9% in 2022, indicating a healthier economic outlook.

Foreign Currency Reserves: As of August 2022, India’s foreign currency reserves were at $573 billion, a decline from $619 billion in March 2022. This contrasts with the $579 billion reported at the end of March 2021 and $474 billion in March 2020. Notably, the reserves-to-debt proportion slightly dipped to 100.3% in March 2022 from 101.1% in March 2021.

Historical Debt Overview:

Debt Trends (1991-2021): Here is the trajectory of India's external debts:

• 1991: External debt was $83.8 billion, with a debt-to-GDP ratio of 28.3% and a debt service ratio at 35.3%. The reserves-to-debt ratio was a mere 7.0%.
• 1996: Debt increased to $93.7 billion, with a debt service ratio improving to 26.2% and the reserves-to-debt ratio rising to 23.1%.
• 2001: External debt reached $101.3 billion, with the debt service ratio falling to 16.6% and reserves-to-debt ratio soaring to 41.7%.
• 2010: Debt rose to $260.9 billion, accompanied by an 18.5% debt-to-GDP ratio. The reserves-to-debt ratio impressively elevated to 106.9%.
• 2021: With external debt at $573.7 billion, the debt-to-GDP ratio was 21.2%, and the reserves-to-debt ratio remained robust at 100.6%.

Composition of Long-Term Debt: Long-term international borrowings are classified into main categories:

• Multilateral Debt: Loans from agencies like ADB, IDA, and IBRD totaled $69.7 billion by March 2021.
• Bilateral Debt: Government-to-government loans were $31.0 billion by March 2021, growing from $28.1 billion in March 2020.
• Commercial Borrowings: The largest segment, consisting of loans from global banks, amounted to $213.2 billion in March 2021.
• NRI Deposits: NRI deposits comprised $141.9 billion in March 2021.
• Export Credit: Export-supporting loans tallied $6.5 billion as of March 2021.
• Rupee Debt: The smallest segment, at $1.0 billion by March 2021.

Short-Term Debt: This segment includes debts maturing in under a year, totaling $101.1 billion as of March 2021, primarily consisting of trade-related credits.

Impact and Management Strategies:

• Economic Impacts: Prudent debt management is essential to prevent financial crises and secure economic stability. Excessive debt can increase vulnerability to global market changes. However, effective management and robust reserves mitigate potential challenges.
• Debt Service Ratio: Charting at 8.2% in March 2021, a lower ratio indicates a better ability to leverage export revenue for debt management.
• Foreign Exchange Reserves: Strong reserves enhance investor confidence, potentially improving India’s borrowing terms.
• Policy Measures: Efforts include boosting foreign direct investment, managing balance of payments, and diversifying external financing sources. Periodic reviews ensure strategies are responsive to emerging economic dynamics.

Conclusion: Although India’s external debt is significant, it is effectively managed through strategic policies, substantial reserves, and varied debt sources. This balance between debt servicing and economic growth underpins India's stable economic progress and continuous development.