India’s External Debt Rose By Nearly 3% To $559 Billion In 2019-20: Finance Ministry Report

The increase in India’s external debt in 2019-20 was mainly due to a rise commercial borrowings, finance ministry says in a report

A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A U.S. one-hundred dollar banknote and Indian ten rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

India’s total external debt rose 2.8% year-on-year to $558.5 billion as on March 31, 2020, mainly due to a rise commercial borrowings, according to a finance ministry report.

The external debt stood at $543 billion at the end of March 2019.

According to ‘India's External Debt: A Status Report: 2019-2020

  • The ratio of foreign currency reserves to external debt stood at 85.5% in FY20.
  • External debt as a percentage of GDP rose to 20.6% in FY20 from 19.8% a year ago.
  • Sovereign debt shrank 3% year-on-year to $100.9 billion in FY20 as FIIs’ holding in government securities fell 23.3% year-on-year to $21.6 billion. Loans from multi-lateral and bilateral sources under external assistance grew 4.9% year-on-year to $87.2 billion.
  • Non-sovereign debt rose 4.2% to $457.7 billion in FY20 as commercial borrowings increased by 6.7% to $220.3 billion. Outstanding NRI deposits remained steady at $130.6 billion.

In most emerging markets, as the economy expands, foreign debt accumulates to address shortage of domestic savings. India is no exception to this phenomenon.

Economic activity in India influences the accumulation of external debt, reflecting the policy over the years of enabling private sector to access foreign debt. Precisely the reason why non-sovereign debt (private sector debt) was four times that of sovereign debt at the end of the previous fiscal.

Further, the report stated, non-financial corporations are biggest debtors, accounting for 42% of total debt, followed by deposit-taking corporations (28.3%) and the general government (18.1%).

However, as the momentum of economic activity slowed in 2019-20, private sector's appetite to access foreign debt ebbed, resulting in relatively lower growth of 6.7% in the stock of commercial borrowings as of end-March 2020 when compared to that recorded during the first five years of the previous decade.

The report observed that the stock of NRI deposits in FY20, being almost equal to the level recorded in FY19, needs to be seen in the context of, among others, softening of interest rates on NRI deposits. "About 81% of the total stock of external debt is long-term, that is, having maturity of greater than one year, predominately in the form of commercial borrowings and NRI deposits,” it said.

Remaining 19% of debt is short-term, primarily in the form of short-term trade credit. Short-term trade credit, constituting about 95% of the total short-term debt, is used for financing imports.

Noting that the US dollar is the predominant currency for denomination of India's external debt with a share of 53.7% of the total debt as at end-March 2020, it said, the US dollar appreciation as on March 31 this year over the level a year ago resulted in a valuation gain of $16.6 billion.

In other words, it said, excluding these valuation gains, increase in India's external debt as at end-March 2020 over the level a year ago would have been $32 billion.

Going forward, the report said, as the economic activity in India gathers pace and gains traction, stock of external debt would increase.

However, there does not appear to be any cause for concern, given the benign level of debt vulnerability and rising domestic savings would counter-balance the imperative of accessing foreign debt.

Thus, while augmenting growth would lead to foreign debt levels increasing, rising savings would moderate such rise in foreign debt levels, it said.