Why is it in the news?

Recently, the Union Finance Minister released ‘India’s External Debt: A Status Report 2022-23’

Key highlights of the report

• India’s external debt stood at $624.7 billion as of March-end 2023.
• The debt-service ratio is 5.3%, considered within a comfortable range.
• External debt to GDP ratio decreased from 20% to 18.9% between March-end 2021-22 and 2022-23.
• Long-term debt constituted 79.4% of the total external debt, contributing to stability.

Comparison with other countries

• India’s external debt metrics are favourable compared to most low and middle-income countries (LMICs).
• Indicators such as short-term debt share, external debt to GNI, forex reserves to external debt, and external debt to exports highlight India’s strong position.

Debt -Service Ratio

• The debt-service ratio slightly increased from 5.2% to 5.3% during 2022-23.
• This increase was primarily due to higher debt service payments, which rose from $41.6 billion to $49.2 billion.

Factors contributing to increased debt services payments

• Commercial borrowings, including multilateral and bilateral sources, saw a 16.7% increase.
• External assistance payments increased by 17.2%.
• NRI deposits contributed to a 31.7% increase in payments.

Marginally Higher External Debt

• India’s external debt increased by 0.9% or $5.6 billion compared to the previous year.
• Foreign exchange reserves covered 92.6% of the external debt at March-end 2023.

External Debt of a country

About

• External debt is money borrowed from sources outside the country.
• It must be repaid in the currency in which it was borrowed.
• Sources of external debt include foreign commercial banks, international financial institutions (e.g., IMF, World Bank, ADB), and foreign governments.
• These debts are often tied loans, with predefined purposes agreed upon by borrower and lender.
• Governments and corporations can raise loans from abroad in the form of external commercial borrowings.
• Interest rates on foreign loans are typically linked to LIBOR, with the actual rate being LIBOR plus an applicable spread based on the borrower’s credit rating.
  • LIBOR, the acronym for London Interbank Offer Rate, is the global reference rate for unsecured short-term borrowing in the interbank market.
  • It acts as a benchmark for short-term interest rates. It is used for pricing of interest rate swaps, currency rate swaps as well as mortgages.

Types of External Debt

• Public and publicly guaranteed debt.
• Non-guaranteed private-sector external debt.
• Central bank deposits.
• Loans from the International Monetary Fund (IMF).

Impact of Rising/Defaulting on External Debt

• Rising external debt can lead to a debt crisis if a country with a weak economy cannot repay due to an inability to generate revenue.
• Sovereign default occurs when a nation cannot or refuses to repay external debt, potentially leading to asset withholding by lenders.
• Defaults can have cascading effects, including currency collapse and stalled economic growth.
• Countries facing default may try to avoid repaying external debt.
• Excessive foreign debt can limit a country’s ability to invest in its economic future, hindering long-term growth.