India’s External Debt Hits $717.9 Billion: A Critical Analysis of Economic Impact and Future Challenges

New Delhi: India’s external debt reached an all-time high of $717.9 billion at the end of December 2024, reflecting a 10.7% year-on-year increase from $648.7 billion in December 2023. This sharp rise, reported in the Quarterly External Debt Report (December 2024) by the Finance Ministry, raises concerns about India’s borrowing trends and economic sustainability.

While external debt is a normal part of economic management, the valuation effect, primarily due to the appreciation of the US dollar, contributed $12.7 billion to this increase. Excluding this effect, the real increase stood at $17.9 billion quarter-on-quarter.

Key Highlights of India’s External Debt Report (December 2024)

1. Debt-to-GDP Ratio:
   1. The external debt-to-GDP ratio stood at 19.1% in December 2024, slightly up from 19.0% in September 2024.
2. Composition of External Debt:
   1. The US dollar dominates India’s external debt, comprising 54.8% of the total, followed by:
      1. Indian Rupee: 30.6%
      1. Japanese Yen: 6.1%
      1. Special Drawing Rights (SDR): 4.7%
      1. Euro: 3%
3. Short-Term vs. Long-Term Debt:
   1. Long-term debt increased marginally.
   1. Short-term debt declined slightly, reducing potential near-term repayment pressure.
4. Debt Service Ratio:
   1. The debt service ratio (principal repayments + interest payments as a percentage of current receipts) fell to 6.6% from 6.7% in September 2024.
5. Sector-wise External Debt:
   1. Non-government debt rose, while the central government’s outstanding external debt declined.
   1. The largest contributors to external debt were:
      1. Non-financial corporations (36.5%)
      1. Deposit-taking corporations (27.8%)
      1. Central government (22.1%)
      1. Other financial corporations (8.7%)
6. Types of External Debt:
   1. Loans: 33.6%
   1. Currency & deposits: 23.1%
   1. Trade credit & advances: 18.8%
   1. Debt securities: 16.8%

Major Causes Behind the Rising External Debt

1. Valuation Effect and Exchange Rate Volatility

The sharp appreciation of the US dollar against the Indian rupee, yen, euro, and SDR significantly inflated India’s external debt valuation. This alone accounted for a $12.7 billion increase in the quarter ending December 2024.

2. Increasing Borrowing for Economic Growth

India continues to borrow externally to fund infrastructure projects, energy initiatives, and digital transformation efforts. However, while borrowing boosts economic growth, sustainability concerns arise if external liabilities grow too fast.

3. Declining Domestic Savings and Capital Inflows

Lower domestic savings and capital outflows due to global uncertainties have made external borrowing a necessary alternative for businesses and the government.

4. Rising Global Interest Rates

As the US Federal Reserve and European Central Bank maintain high interest rates to counter inflation, India’s cost of borrowing externally has risen. This, in turn, contributes to a higher overall debt burden.

5. Declining Export Growth and Trade Deficit

A weaker global economy and reduced demand for Indian exports have slowed foreign exchange earnings, making it harder to offset rising debt obligations.

Economic Risks Posed by Rising External Debt

1. Increased Debt Servicing Burden

With the majority of India’s external debt denominated in foreign currencies, any rupee depreciation makes repayment more expensive. A further decline in the rupee could significantly inflate repayment costs.

2. Inflation and Interest Rate Risks

A rising external debt can fuel inflation, forcing the Reserve Bank of India (RBI) to raise domestic interest rates, which can slow economic growth and investment.

3. Stagflation Concerns

Global analysts warn of stagflation—a scenario where economic growth stagnates while inflation remains high. If this materializes, it could worsen India’s external debt-to-GDP ratio.

4. Foreign Exchange Reserves Depletion

India’s Forex reserves help manage external debt repayments. If reserves decline, the country may face balance-of-payments stress, similar to the 1991 crisis.

Policy Recommendations to Manage External Debt

1. Reduce Reliance on the US Dollar

Diversifying external debt to rupee-denominated bonds and expanding bilateral agreements for currency swaps can reduce the risks associated with dollar fluctuations.

2. Strengthen Export Growth & Trade Policies

To counterbalance rising debt, India must boost exports through:

• Strengthening manufacturing & technology exports
• Expanding trade with non-traditional markets
• Enhancing Make in India and Atma Nirbhar Bharat initiatives

3. Sustainable Borrowing Practices

The government should ensure that borrowed funds are primarily used for productive investments (infrastructure, technology, education) rather than recurring expenditures.

4. Improve Fiscal Discipline

A tighter monetary policy and controlled fiscal deficit will help stabilize debt levels, preventing excessive external dependence.

5. Monitor Global Economic Risks

With geopolitical uncertainties (Ukraine war, China’s economic slowdown) impacting global capital flows, India must carefully manage its external debt strategy to minimize exposure to global financial shocks.

Conclusion: Can India Sustain Its Growing External Debt?

India’s $717.9 billion external debt marks a significant economic development, reflecting both growth ambitions and rising vulnerabilities. While debt-driven expansion can fuel economic progress, careful management is essential to ensure long-term financial stability.

The government must now prioritize debt sustainability, diversify foreign currency risks, boost exports, and improve fiscal policies. With proactive economic reforms, India can balance external liabilities with robust economic growth, ensuring a stable future.

Frequently Asked Questions (FAQs)