India’s External Debt: Increase Offset by Stronger GDP Growth

On June 25, 2024, the Reserve Bank of India (RBI) released data on India’s external debt. While the headline figure showed a rise in external debt, a closer look reveals a positive trend.

External Debt Up, But Ratio to GDP Down

India’s external debt reached $663.8 billion at the end of March 2024, reflecting an increase of $39.7 billion compared to the same period in 2023. However, this rise is partially attributable to the effects of currency valuation. Excluding this factor, the external debt increase would have been $48.4 billion.

More importantly, despite the absolute rise in debt, India’s external debt to GDP ratio actually improved. The ratio dipped to 18.7% at the end of March 2024, compared to 19.0% a year earlier. This improvement signifies that India’s economic growth has outpaced the increase in external debt, indicating a relatively stable position.

Debt Composition and Sources

The RBI data also sheds light on the composition of India’s external debt. The government’s external debt remains modest, standing at 4.2% of GDP. The non-government sector contributes the larger share, at 14.5% of GDP.

When it comes to currency denomination, the US dollar continues to dominate, accounting for 53.8% of the total external debt. This is followed by debt denominated in Indian rupees (31.5%), yen (5.8%), SDR (Special Drawing Rights – 5.4%), and euro (2.8%).

In terms of debt instruments, loans comprise the largest chunk (33.4%), followed by currency and deposits (23.3%), trade credit and advances (17.9%), and debt securities (17.3%).

Short-Term Debt Management

The RBI report also highlights a positive development in short-term debt management. The ratio of short-term debt to foreign exchange reserves has declined to 19.0% at the end of March 2024, compared to 22.2% a year earlier. This indicates a more balanced debt structure and improved short-term debt management.

Looking Ahead

The RBI’s data paints a nuanced picture of India’s external debt situation. While the headline figure shows an increase, the decline in the debt-to-GDP ratio and improved short-term debt management are positive signs. Going forward, effective debt management strategies will be crucial to ensure sustainable economic growth for India.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.