Insights on India's External Debt Growth 2024

Impact of External Debt on India's Economy

India's external debt has been a topic of concern as it increased by $39.7 billion in the past fiscal year to reach $663.8 billion by the end of March 2024. However, despite this increase, the country's external debt to GDP ratio actually declined slightly to 18.7 per cent from 19 per cent in the previous fiscal year. This decline can be attributed to the growth in the size of India's GDP, as highlighted by data from the Reserve Bank of India (RBI).

The Role of Valuation and Debt Components

The RBI also noted that a valuation effect, due to the appreciation of the US dollar against the Indian rupee and other major currencies, amounted to $8.7 billion. Without this effect, India's external debt would have increased by $48.4 billion instead of $39.7 billion. The data further reveals that long-term debt, with an original maturity of over one year, increased to $541.2 billion by March 2024, showing an uptick of $45.6 billion from the previous year.

Furthermore, the share of short-term debt with an original maturity of up to one year in total external debt declined to 18.5 per cent by March 2024 from 20.6 per cent in March 2023. This decline was also reflected in the ratio of short-term debt to foreign exchange reserves, which decreased to 19 per cent in March 2024 from 22.2 per cent in March 2023.

Short-term debt on a residual maturity basis accounted for 42.9 per cent of total external debt by March 2024, and US dollar-denominated debt remained the largest component at 53.8 per cent. Interestingly, the outstanding debt of both government and non-government sectors increased by the end of March 2024 compared to the previous year.

Challenges and Outlook for India

The increase in India's external debt poses challenges, particularly in terms of debt service, which includes principal repayments and interest payments. Debt service increased to 6.7 per cent of current receipts by the end of March 2024 from 5.3 per cent in the previous year. This highlights the importance of effectively managing external debt to ensure sustainable economic growth and stability.

Looking ahead, it will be crucial for India to continue monitoring its external debt levels, debt composition, and debt service obligations to maintain a healthy balance between borrowing and economic growth. With the debt-to-GDP ratio showing a slight decline, there are opportunities for India to leverage its economic potential and navigate external financial challenges in the years to come.