External debt of India

External debt of India

Subject: Economy

Section: External sector

Context:

Against India’s current external debt to GDP ratio of 20 per cent, the estimated threshold level is between 23 percent and 24 per cent of GDP, indicating space for attracting more external debt inflows of $ 90 billion- says the RBI study on ‘Growth maximizing external debt of India’.

Concept:

• The total external debt crossed the pre-pandemic levels as at end-December 2020.
• The external debt to GDP ratio as at end-December 2021 was 20.0 per cent.
• Main factors for the rise– NRI deposits, commercial borrowings and short-term trade credit -all crossed the pre-pandemic level.
• India’s external debt remained relatively immune to the global financial crisis (GFC) reflecting the resilience of commercial borrowings, the most growth-sensitive and the largest component of India’s external debt. 
• India attracted only $ 3.23 billion NRI deposits in FY22 as against $ 7.36 billion a year ago.
  • Non-resident external rupee account (NR(E)RA) witnessed a growth of $ 3.33 billion in FY22 as against $8.84 billion last year.
  • FCNR (B) deposits declined by $ 3.55 billion in FY22.

The External Debt-to-GDP ratio is the ratio between the external  debt to the gross domestic product (GDP) of a country. The ratio indicates the capability of a country in repaying its external debts. A country with a low external debt-to-GDP ratio indicates that it is capable of producing and selling goods and repaying its debts without incurring further debt. Various economic and geopolitical factors such as recessions, interest rates, war, etc influence the debt account of a country.

Composition of India’s external debt

• Multilateral -Multilateral institutions such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) etc are regarded as multilateral creditors.
• Bilateral – nations that engage in sovereign and non-sovereign arrangements such as one-to-one loan arrangements are bilateral creditors. India’s bilateral creditors are Japan, Germany, the United States, France, etc.
• International Monetary Fund –loans from IMF in form of SDR
• Trade Credit -It is when the loans and credits are extended for imports by overseas suppliers, banks and financial institutions to sovereign and non-sovereign entities.
• Commercial Borrowings -It includes borrowings from commercial banks, financial institutions, money that is raised through issuing securitized instruments such as bonds, floating rate notes (FRN), securitized borrowing of commercial banks etc.
• NRI Deposits (above one-year)
• Rupee Debt 
• Total Long-Term Debt– is debt with an original maturity of more than one year
• Short-term Debt– is defined as debt repayments on-demand or either with an original maturity of one year or even less.

External debt sustainability:

A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default. External debt sustainability can be measured based on the following parameters:

• Government’s debt and current fiscal revenue ratio.
• The overall share of short and long-term debt in the total debt burden.
• Share of concessional debt.
• Foreign debt to exports ratio
• Debt to GDP ratio
• The share of external debt to the total debt of the country.