India’s external debt position, though stable in comparison to some of its global counterparts, presents significant challenges as the nation faces the complexities of global finance. While foreign borrowing has historically supported development initiatives, the rising magnitude of external debt and its servicing obligations are becoming areas of concern for policymakers, especially in the context of global economic uncertainties.
The World Bank’s International Debt Report 2024 highlights a troubling surge in external debt among Low- and Middle-Income Countries (LMICs), which reached an all-time high of $8.8 trillion in 2023. India’s external debt stood at $646.8 billion, with an annual interest obligation of $22.5 billion. Although this pales in comparison to China’s $2.4 trillion or the U.S.’s $26.5 trillion, India’s external debt has grown substantially over the years—from $290.4 billion in 2010 to nearly $648.2 billion by the end of 2023. This growth is emblematic of a broader trend among developing nations, where debt accumulation often reflects the tension between developmental needs and financial stability.
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The global context amplifies the challenge. Developed nations such as the UK, Netherlands, and Luxembourg have debt-to-GDP ratios exceeding 200%, signalling an unsustainable debt trap. For instance, the UK’s external debt accounts for a staggering 272.77% of its GDP, while Luxembourg’s debt-to-GDP ratio is an astronomical 4,155%. Meanwhile, developing countries face a different set of challenges, as rising interest payments frequently outstrip investments in critical sectors like health and education. In Africa, for example, average spending on interest payments exceeds per capita allocations for education or healthcare. This imbalance highlights the socio-economic costs of excessive debt, which often exacerbates inequality and stifles progress in human development.
Dimensions of India’s external debt
India’s external debt comprises both private (51%) and public borrowing, with significant contributions from bondholders (35%) and commercial debt (16%). Multilateral agencies like the World Bank and Asian Development Bank also play a pivotal role, accounting for 33% of the government’s external debt. Bilateral credit, too, remains a significant component, with Japan alone contributing 11% of India’s bilateral loans.
Key indicators suggest that India’s debt is manageable, yet the trends warrant attention. The external debt-to-GDP ratio has decreased from 28.3% in 1991 to 18.8% in 2023, reflecting improved fiscal discipline. The debt service ratio has also seen remarkable improvement, standing at 6.8% in 2023 compared to 35.3% in 1991. However, the depreciation of the Indian rupee—currently at ₹84.48 to the dollar—has significantly increased the cost of servicing this debt. With over 54% of India’s external debt denominated in U.S. dollars, currency volatility poses a persistent risk.
India’s reliance on worker remittances and export revenues has historically provided a buffer against external shocks. In 2024, India received $129.1 billion in remittances, representing 14.3% of the global share—the largest for any single country. However, the depreciation of the rupee, coupled with rising global interest rates, underscores the need for strategic debt management to prevent fiscal imbalances from spiralling out of control.
Geopolitical and structural challenges
India’s external debt challenges are compounded by a volatile global environment. Geopolitical tensions, including the U.S.-China trade war and rising protectionism, are constraining global trade flows. Additionally, tighter immigration rules under the U.S. administration threaten to impact India’s workforce exports, a critical source of remittances. The growing reliance on external commercial borrowings, combined with a depreciating rupee, has heightened India’s vulnerability to external shocks.
The global debt landscape presents a stark warning. As noted in UNCTAD’s 2024 report, public debt worldwide reached an unprecedented $97 trillion in 2023, with developed nations accounting for the lion’s share. The report also highlighted the socio-economic consequences of excessive debt, which often manifests in rising inequality and social unrest. Countries like Sri Lanka and Kenya have already experienced such fallout, with unsustainable debt levels fuelling economic crises and civil unrest.
Policy recommendations
To address these challenges, India must adopt a multi-pronged approach. Diversifying currency transactions is one potential solution. By reducing reliance on the U.S. dollar and promoting bilateral trade agreements in local currencies, India can shield itself from exchange rate volatility. Strengthening export competitiveness is equally critical. Investments in infrastructure, supply chain resilience, and logistical support can boost export revenues, reducing the need for external borrowing.
India’s substantial worker remittance inflows present another opportunity. Policies aimed at sustaining and increasing these inflows can further bolster foreign exchange reserves. Additionally, sustainable debt practices must be prioritised. This includes ensuring that government borrowing is directed toward investment rather than consumption and addressing systemic inefficiencies that result in fiscal leakages. Finally, allowing the rupee to stabilise naturally without excessive intervention from the Reserve Bank of India (RBI) could improve currency resilience and mitigate the risks associated with external borrowing.
India must also focus on climate financing, which remains underfunded in comparison to interest payments. By prioritising green infrastructure and renewable energy initiatives, the government can create a foundation for sustainable growth that addresses both economic and environmental challenges.
India’s external debt, while not at an alarming level, necessitates proactive management to avoid potential pitfalls. The lessons from global debt crises, as seen in countries like Mexico and Sri Lanka, underscore the importance of balancing borrowing with economic growth. Amidst a volatile global environment, India’s focus on robust fiscal policies, export-led growth, and currency stabilisation will be critical to safeguarding its economic future.
As the nation aims to become a developed economy by 2047, sustainable debt management and inclusive economic policies will play a decisive role. Navigating these challenges successfully will not only fortify India’s resilience against external shocks but also ensure that the benefits of economic growth are equitably distributed.
Dr Ravindran AM is an economist based in Kochi. He has more than three decades of academic and research experience with institutions such as CUSAT, Central University of Kerala, Cabinet Secretariat - New Delhi, and Directorate of Higher Education Pondicherry.