Clipped from: https://www.thehindubusinessline.com/opinion/editorial/exceptional-record/article70041954.ece
India’s external debt metrics are sound, with a few chinks
After a close brush with a balance of payments crisis in 1991 and a run on the rupee during the 2013 taper tantrum, India has had reason to be extra-cautious with its external debt obligations. The latest status report by the Department of Economic Affairs (DEA) showcases the massive improvement in its external debt metrics since those episodes. India’s external debt-to-GDP ratio at 19 per cent in FY25 has halved from 39 per cent in FY92 and 24 per cent in FY14. Its foreign exchange reserves, which barely covered 10 per cent of its external borrowings in FY92 have been assiduously built up to 91 per cent by FY25; debt servicing costs are at just 6.6 per cent of export earnings. Much of this improvement is attributable to the government ruthlessly cutting back on its foreign borrowings and pivoting to domestic sources for deficit funding. Foreign borrowings now make up a minuscule 4.4 per cent of Indian government debt compared to 26 per cent in FY91. This puts India at negligible risk of sovereign default even in a phase of global bond turbulence.
India has also kept a tight leash on its debt metrics in the post-Covid era, when many advanced and emerging economies have slipped. Despite an increase in absolute debt from $573 billion to $736 billion in the last five years, India’s external debt is just 0.5 per cent of the global stock of $140 trillion. Its external debt-to-GDP ratio of 19 per cent is well below the average 24 per cent for low-and-middle-income countries. Its forex buffers of 90-100 per cent are far superior to other emerging economies at 40-70 per cent. Therefore, the DEA’s assessment that India’s debt vulnerability indicators are benign is not an over-statement. Credit for this should go to successive governments from both sides of the political spectrum.
While headline numbers on India’s external debt are clearly under control, its composition reveals some vulnerabilities. One, while the government has reduced its foreign borrowings, India Inc has not. Overseas commercial borrowings have surged 32 per cent in just the last two years to make up 40 per cent of external debt in FY25. Indian companies have a history of leaving their dollar debt unhedged. They need to be nudged to take cover. Two, about 41 per cent of the external debt in FY25 was repayable within a year. Commercial trade credit and NRI deposits made up the bulk of this. The latter may flow out in a crisis. Three, efforts to diversify away from US dollar-denominated debt to rupee debt have not made much headway, with dollar debt making up 54 per cent of external obligations in FY25.
The opening up of India’s government bond (g-sec) markets to foreign investors has brought in $43.9 billion in FY25. But this has not moved the needle much on rupee borrowings and is a volatile source. Overall, India seems to be sitting pretty on its external debt position at a time when unsustainable borrowings are triggering bond market scares in advanced economies.
Published on September 12, 2025
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