Why in News :
The Reserve Bank of India (RBI) reported that India’s external debt increased to $736.3 billion as of end-March 2025, registering an annual increase of $67.5 billion. The External Debt-to-GDP ratio also rose to 19.1%, up from 18.5% in March 2024.
Key Highlights of the Report:
- Total External Debt: $736.3 billion (↑ $67.5 billion from FY24)
- Debt-to-GDP Ratio: 19.1% (↑ from 18.5% in FY24)
- Long-term Debt: $601.9 billion (↑ $60.6 billion YoY)
- Short-term Debt Share: Fell marginally to 18.3% of total debt
- Debt Service Ratio: Marginally declined by 0.1%, easing repayment burden
Debt Composition Analysis:
Currency Composition:
- US Dollar: 54.2%
- Indian Rupee: 31.1%
- Japanese Yen, SDRs, and Euro: Smaller shares
Borrower Categories:
- Non-Financial Corporations: 35.5%
- Deposit-taking Corporations (excl. Central Bank): 27.5%
- General Government: 22.9%
- Others (e.g. Central Bank): Remainder
Instruments:
- Loans: 34%
- Currency & Deposits: 22.8%
- Trade Credit & Advances: 17.8%
- Debt Securities: 17.7%
What is External Debt?
External debt is money borrowed from foreign lenders, including:
- Foreign governments
- International financial institutions (e.g. IMF, World Bank)
- Private commercial banks and investors
Why It Matters – Significance of the Data:
Moderate Debt-to-GDP Ratio (19.1%)
- Though rising, it remains below global stress thresholds.
- Indicates prudent overall debt management but requires close monitoring.
Rising Long-Term Debt
- Reflects continued infrastructure and capital-intensive borrowing needs.
- May indicate positive investment flows but adds to future repayment burden.
Decline in Short-Term Debt Share
- Reduces immediate refinancing risk.
- However, rise in short-term debt to forex reserves (20.1%) signals increasing vulnerability to currency shocks.
High USD Dependency (54.2%)
- Heightens India’s exposure to exchange rate volatility and US interest rate cycles
- Amplifies the impact of dollar appreciation, as seen with the $5.3 billion valuation effect.
Economic Implications:
External Vulnerability:
- Any external shock (e.g., oil price spike, Fed rate hike) could worsen India’s external position.
- High external debt means pressure on BoP stability, especially if export earnings stagnate.
Fiscal Management:
- Servicing long-term debt may create medium-term fiscal pressures, especially if the rupee depreciates.
Policy Calibration:
- The government and RBI must maintain a delicate balance between growth-led capital inflows and external sustainability.
Challenges & Way Forward :
| Challenge | Way Forward |
| Rising external liabilities | Promote export competitiveness to generate forex for debt servicing |
| High dependence on USD | Diversify currency basket in external borrowing |
| Short-term vulnerability | Maintain adequate forex reserves and implement dynamic capital controls |
| Valuation shocks | Enhance currency hedging mechanisms and FX risk management |
| Monitoring non-sovereign debt | Improve transparency & monitoring of corporate external commercial borrowings (ECBs) |
Ethics and Governance Angle:
- Prudent debt management is a constitutional obligation and intergenerational responsibility.
- Transparent disclosure by RBI reflects institutional accountability.
| UPSC Relevance : GS3 – Indian Economy; External Sector; Resource Mobilization Mains Practice Question: Q. India’s rising external debt reflects both capital inflows and financial vulnerabilities. Examine the trends, associated risks, and policy responses required to ensure sustainable external sector management. (250 words) |