India’s External Debt Rises to USD 558.5 Billion – India External Debt March 2020

India’s External Debt –  March 2020

India’s external debt as of end-March 2020 was at USD 558.5 billion, an 2.8% rise from USD 543.1 billion seen in the end of March 2019. Valuation gains due to the appreciation of the USD against INR and other major currencies were placed at USD 16.6 billion. Excluding the valuation effect, the increase in external debt would have been USD 32.0 billion instead of USD 15.4 billion at end-March 2020 over end-March 2019. The external debt to GDP ratio is at 20.6% at end-March 2020.

Commercial borrowings remained the largest component of external debt, with a share of 39.4% followed by non-resident deposits (23.4%) and short-term trade credit (19.14%). Long term debt and short term debt (original maturity) formed 80.86% and 19.14% of total external debt.

Short term external debt to total debt ratio has declined to 19.1% in March 2020 from 20% in March 2019. Foreign exchange reserves to external debt ratio was at 85.5% in March 2020 while it was at 76% in March 2019. Short-term Debt to Foreign Exchange Reserves ratio has declined to 22.4% in March 2020 from 26.3% in March 2019.

USD denominated debt is the largest component of India’s external debt with a contribution of 53.7% at end-March 2020.

External Debt - Outstanding and Variation

External debt ratios have deteriorated since 2007-08

India’s external debt has more than doubled from levels of USD 224 billion seen in 2008 to levels of USD 475.8 billion as of end-March 2015. Fx Reserves as % of external debt has deteriorated from 138% of external debt to 71.8% of external debt as an increase in fx reserves has lagged the increase in external debt. Table 2. Fx reserves have increased from USD 304 billion seen in 2008 to USD 341 billion as of March 2015. Deterioration in levels of external debt as % of fx reserves is a worry when there is capital flight and this will lead to a sharp fall in the value of the Indian Rupee. Fx reserves have increased from USD 300 billion to USD 340 billion over the April 2014-March 2015 period. RBI will have to buy USD to shore up fx reserves to improve the external debt to the fx reserves ratio.

In fact, the INR has depreciated from levels of Rs 40 to the USD as of end-March 2008 to levels of Rs 63.57as of 30th June 2015. A good part of this fall can be explained by India’s deteriorating external debt position. The ratio of external debt to GDP has moved up from levels of 18% to 23.8% in the 2008-2015 period. The ratio of short term debt to foreign exchange reserves has moved up from 14.8% to 24.8%.

Tutorial on External Debt

Build up of external debt in fast-growth economies is accompanied by a rally in asset and currency markets. However, when external debt becomes unsustainable, the repercussions are severe with economic contraction and a sharp fall in asset and currency values. Over the years, the boom-bust cycle led by external debt has panned geographies. South America in the 1980s, South East Asia in the 1990s and Iceland in the 2000s. The build-up of external debt of a country leads to an asset boom as foreign money seeking high returns go into speculative asset classes. When the asset bubble bursts, the foreign money tries to find its way out of the country leading to panic selling of assets. Central banks have grappled with external debt problems and have resorted to various methods including sterilization of flows, taxes on flows, and capital controls. Some of the methods adopted by central banks have worked and some have not but the underlying rise and fall in asset prices have not been contained.

What is external debt?

External debt is the money owed to non-residents in the form of interest and principal payment. Debt securities including bonds and money market instruments, deposits, loans, and advances and trade credits are forms of external debt. External debt is categorized into long term and short term. Long term external debt is any debt that has a maturity of one year or more while short term external debt is any debt that has a maturity of one year or less.

Trade credits, money market securities, short term loans, foreign currency deposits, and debt/loans with residual maturity of one year and below are all categorized as short term debt.

How to look at external debt?

External debt is looked at in terms of external debt to GDP ratio, net interest payment to GDP ratio, short term external debt to total external debt ratio, and external debt to foreign exchange reserves ratios. The higher the ratios the higher the risk an economy is running if there is a run on the currency. The external debt indicators for all the countries that suffered crises have been at higher levels.

The South American debt crisis in the 1980s saw external debt to GDP ratios for the countries in the region rise by multifold times. South American countries defaulted on their external debt due to the sharp rise in debt levels.

The southeast Asian crisis in the 1990’s saw countries in the region devaluing their currencies and imposing capital controls to stem the crisis of capital outflows. Countries such as Thailand, Malaysia, Indonesia, Korea had all seen their short term external debt to total external debt ratios rise significantly to over 60%, and when capital started moving out the countries found it impossible to service the short term debt.

Iceland, which was affected by the external debt crisis in 2008, saw its external debt go over 1000% of GDP and its net interest payments on debts go close to 20% of GDP. Iceland had to be bailed out by the IMF as it faced an economic collapse due to the burden of its external debt.

All the crisis-ridden countries had external debt much higher than foreign exchange reserves.

What are the levels of external debt ratios to get worried about?  

There is no single threshold level of external debt that signals destabilizing signs. A research done by BIS (Bank of International Settlement) shows that net external debt higher than 50% of GDP and net interest payments higher than 3% of GDP are levels to worry about. The lower the short term debt to external debt ratio the better as there is less pressure on a country to depend on capital flows to service short term debt. Short term debt at over 50% of total external debt will exert pressure on the country’s ability to service the debt. Foreign exchange reserves should be able to cover a few months of imports as well as repayment of short term debt.

External Debt - Outstanding and Variation (US$ billion) (June 2016)

External Debt - Outstanding and Variation (US$ billion) (March 2016)

 External Debt - Outstanding and Variation (US$ billion) (December 2015)

External Debt - Outstanding and Variation (US$ billion) (September 2015)

India’s Key External Debt Indicators (September 2015)