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

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.

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.

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.

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.

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 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.

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.