India’s External Debt Rises to $736 Billion

Syllabus: GS3/ Economy

Context

• India’s external debt rose to $736.3 billion, or 19.1 per cent of gross domestic product (GDP), at the end of March 2025 from $668.8 billion, or 18.5 per cent of GDP, a year ago.

What is External Debt?

• External debt is the portion of a country’s debt borrowed from foreign lenders, including sovereign governments, international financial institutions, and private commercial entities. 
• It can be categorized into:
  • Long-term debt (original maturity over one year)
  • Short-term debt (original maturity up to one year)

Key Trends in India’s External Debt

• The long-term debt at end-March 2025 was placed at $601.9 billion, an increase of $60.6 billion over its level at end-March 2024.
• The share of short-term debt in total external debt declined to 18.3 per cent at end-March 2025 from 19.1 per cent at end-March 2024.
  • However, the ratio of short-term debt (original maturity) to foreign exchange reserves increased to 20.1 per cent at the end of FY25.
• The debt structure: Loans (34 per cent) remained the largest component of external debt, followed by currency and deposits (22.8 per cent), trade credit and advances (17.8 per cent), and debt securities (17.7 per cent).
  • US dollar-denominated debt remained the largest component of India’s external debt, with a share of 54.2 per cent.

Challenges Posed by Rising External Debt

• Currency Risk: Over half of India’s debt is USD-denominated. Any depreciation of the rupee increases the repayment burden.
• Short-Term Vulnerabilities: Though the share of short-term debt declined, the short-term debt to forex reserves ratio rose, indicating increased rollover risk in times of global volatility.
• Sovereign Credit Risks: Persistent increase in external debt without proportionate export or growth gains can affect India’s sovereign credit rating, increasing the cost of future borrowings.
• Interest Payment Burden: As external debt grows, so does the outflow on account of interest payments, contributing to a widening of the primary income deficit in the current account.

Way Ahead

• Rupee-Denominated Borrowing: Encourage issuance of Masala Bonds and bilateral currency agreements to reduce reliance on USD.
• Enhance Debt Transparency: A comprehensive framework to track private sector external debt and its currency exposure is needed.
  • Strengthen the monitoring of External Commercial Borrowings (ECBs), especially by NBFCs and startups.
• Deepen Forex Reserves: Build a robust export-oriented industrial policy to generate foreign exchange.
  • Maintain strong foreign exchange reserves to counter external shocks.
• Fiscal Prudence: Adhere to the FRBM roadmap to ensure that external borrowing does not supplement unsustainable domestic deficits.

Concluding Remarks

• India’s rising external debt is a double-edged sword. While it signifies deepening global engagement and capital access, it also brings macroeconomic vulnerabilities, especially in uncertain global conditions.
• Amid global financial uncertainties, India must adopt a comprehensive debt management strategy that prioritizes, Sustainability over scale, Resilience over risk, and Stability over short-term gains.

Source: BS