External debt

Subject: Economy

Context:

India’s total external debt increased by 2.8 per cent to USD 558.5 billion at the end of March mainly on account of a rise in commercial borrowings, according to a report released by the Finance Ministry.

Findings:

• External debt as a ratio to GDP rose marginally to 20.6%, from 19.8 %, ‘India’s External Debt: A Status Report: 2019-2020’ showed.
• Sovereign debt shrank 3% to $100.9 billion, this decrease was primarily due to a fall in FII investment in G-Secs — the second-largest constituent — by 23.3% to $21.6 billion, from $28.3 billion in 2019.
• Loans from multilateral and bilateral sources under external assistance — the largest constituent of sovereign debt — grew 4.9% to $87.2 billion.
• Non-sovereign debt, on the other hand, rose 4.2% to $457.7 billion mainly due to an increase in commercial borrowings — the largest constituent — by 6.7% to $220.3 billion.
• Outstanding NRI deposits — the second-largest constituent — at $130.6 billion was almost equal to the level a year earlier.
• The ratio of foreign currency reserves to external debt stood at 85.5% as at end-March, compared to 76% in 2019 March.

Concept:

• It refers to money borrowed from a source outside the country. External debt has to be paid back in the currency in which it is borrowed.
• External debt can be obtained from foreign commercial banks, international financial institutions like IMF, World Bank, ADB etc and from the government of foreign nations.
• Normally these types of debts are in the form of tied loans, meaning that these have to be used for a predefined purpose as determined by a consensus of the borrower and the lender.
• Sovereign debt is a central government’s debt. It is debt issued by the national government in a foreign currency in order to finance the issuing country’s growth and development.