InvestorQ : Is it true that India’s external debt has gone up sharply in the year FY22?
Tisha Malhotra made post

Is it true that India’s external debt has gone up sharply in the year FY22?

Aashna Tripathi answered.
1 month ago

External debt is the total borrowings of Indian businesses from the global market and denominated in global currency. Indian government does not borrow sovereign debt, so the external debt is predominantly of the corporate nature. For fiscal year FY22, the external debt of the Indian economy surged up by 8.2% to $620.7 billion comparable to the March 2021 levels. In the last few years, the level of external debt has consistently gone up.

However, external debt must be seen in relative terms and not just in absolute terms. If rise in external debt is a concern, the external debt as a share of GDP has actually fallen over last year. For instance, between March 2021 and March 2022, the ratio of external debt to GDP actually fell from 21.2% to 19.9%. One factor to note is that the actual debt accretion was $58.8 billion but got reduced by the $11.1 billion of currency gains on a strong dollar.

What is the colour of this external debt of the Indian economy. As of March 2022, out of the $620.7 billion of external debt, long-term debt was nearly $500 billion. However, here we are referring to debt with original maturity of above one year and not residual maturity. If we reclassify long term debt with residual maturity of less than 1 year also as short term debt, then the total short term debt as a share of GDP would be around 43%.

Let me now turn to the currency mix of the external debt for the fiscal year FY22. Not surprisingly, it is dollar debt still dominates at 53.2% of the total external debt. However, other currencies are growing rapidly too. This is followed in the order by Indian rupee debt (31.2%), SDR (6.6%), yen debt (5.4%) and euro debt at (2.9%). The biggest share of debt was that of non-financial companies at 40.3% of the total external debt of India.

Apart from non-financial Indian companies, the deposit-taking corporations accounted for 25.6% of the external debt while the general government accounted for 21.1%. If you look at a product wise classification, then the dominant category of external debt was in the form of loans at 33% followed close behind by contributions from currency and deposits (22.7%). While trade credit and advances accounted for 19%, debt securities was 17.1%.

However, the encouraging news for India is not just on the share of external debt front, but also on the cost of servicing the debt. For example, for March 2022, the debt service ratio (Principal plus interest) fell to 5.2% of current receipts. That has sharply come down from over 7% of receipts as of Marcy 2021. Clearly, the external debt story of India appears to be under control and the growth is absolute and not on a relative basis.