External Debt

Notes

External debt is the outstanding amount of disbursed and contractual liabilities that residents owe to non-residents and that require payment of principal or interest in the future. India's external debt is compiled and published by the Ministry of Finance (Department of Economic Affairs) every quarter.

Position (approximate): about US$700 billion or more, or about 19% of GDP. Most of it is non-government (private) debt; sovereign (government) external debt is a small share (about one-fifth).

Components

Multilateral loans (World Bank, ADB), bilateral loans, IMF (including SDR allocations), trade credit, commercial borrowings (ECBs), NRI deposits, rupee-denominated debt, and short-term debt.
Currency composition: the US dollar is the largest share (about half), followed by the Indian rupee (about a third), yen, SDR and euro.

Indicators of sustainability

External debt to GDP; debt service ratio (principal and interest payments as a share of current receipts; low at about 6-7%); short-term debt to reserves (about one-fifth); reserves to total external debt (close to 100%); share of long-term debt (over four-fifths).

Policy

External Commercial Borrowings (ECBs): loans raised by Indian firms abroad, regulated by the RBI (automatic and approval routes, cost ceilings, end-use and hedging norms). Masala bonds are rupee-denominated bonds issued abroad, which shift the currency risk to the investor (the first issue was by the IFC in 2014).
Constitutional basis: Art. 292 (Union borrowing) and Art. 293 (States borrow only within India).
Risks: exchange-rate risk (a weaker rupee raises the repayment burden), refinancing risk, and a sudden stop of capital. India's reliance on concessional multilateral and bilateral loans before 1991 shifted to commercial and short-term borrowing, one cause of the 1991 crisis.

Key Points

External debt: what residents owe to non-residents; reported quarterly by the Ministry of Finance.
About US$700 billion, around 19% of GDP; mainly private (ECBs, NRI deposits, trade credit).
Indicators: debt-GDP, debt service ratio, short-term debt to reserves.
Masala bonds are rupee-denominated and issued abroad.
The risks are exchange-rate and refinancing risks.

MCQs

Q1. Masala bonds are: (a) Dollar-denominated bonds (b) Rupee-denominated bonds issued abroad (c) Government securities for NRIs (d) Gold bonds Ans: (b).

Q2. The debt service ratio is: (a) Debt/GDP (b) Principal and interest payments as a share of current receipts (c) Reserves/debt (d) Short-term debt/long-term debt Ans: (b).

Q3. Which of the following is the largest currency component of India's external debt? (a) Rupee (b) US dollar (c) Yen (d) Euro Ans: (b).