India must strike a balance between utilising debt as a financial tool and ensuring fiscal sustainability
Published Date – 11:30 PM, Sun – 15 October 23
By Sushiila Ttiwari, D Samarender Reddy
India, a rapidly developing nation aiming for a $5-trillion economy by 2027, has made substantial strides in many sectors. This is certainly a great endeavour and does have potential. However, one looming concern that has persisted is the issue of external debt.
While such debt is a tool leveraged by many nations to finance development and address fiscal gaps, an excessive burden of external debt can have adverse implications on economic stability, sovereignty and prospects of a country.
India’s continued economic growth and development ambitions have necessitated external borrowing to fund infrastructure projects, promote industrial growth and address fiscal requirements. In the long run, larger government debt may slow the growth of potential output and consumption because of the costs of servicing external debt along with other issues discussed in this article. As a true Indian, it is our duty to enlist the concerns and solutions that can help our nation achieve this ambitious goal and ensure we continue to shine in the economic diaspora of the world.
India’s external debt has been steadily increasing over the years. As per the September 2023 Status Report by the government of India on India’s External Debt 2022–23, the total external debt stood at approximately $624.7 billion, as of March 2023. Foreign exchange reserves covered 92.6% of the external debt. The external debt to GDP ratio was 18.9% and long-term debt (with original maturity of above one year) was placed at $496.3 billion. Loans remained the largest component of external debt, with a share of 32.5%, followed by currency and deposits (22.6%), trade credit and advances (19.9%), and debt securities.
The US dollar continues to be the leading currency of denomination accounting for 54.6% of the total external debt followed by the Indian rupee (29.8%), SDRs (6.1%), Japanese yen (5.7%), and euro (3.2%).
While there have been consistent efforts by the RBI and the Ministry of Finance to justify these loans and allay all concerns, can we really afford to be complacent considering the global economic turbulence? The political sentiments across the world are currently in favour of India, but can we choose to be ignorant and arrogant or assume that this will remain the same forever? Today’s market belongs to either those who are the first or the ones who are the fastest. We certainly aren’t the first.
Future Generations
Excessive levels of foreign debt can thwart long-term economic growth. This happens because countries’ ability to invest in their economic future — whether it be via infrastructure, education or healthcare — is hampered as their limited revenue goes to servicing their loans. In FY23, India’s annual interest payments on external debt amounted to around $19.66 billion.
India’s debt service ratio stood at around 5.3% as of March 2023. However, the stagflation threat that is looming large over the major economies of the world can sharply decrease future demands for Indian exports, adversely affecting the debt service ratio.
We need to ensure higher exports and consistently work towards the betterment and growth of MSMEs. Investment in skill development, incentivising manufacturing of downstream end-products, spending more on education and investing in R&D in all sectors, including agriculture and sports, are key to ensuring the welfare of future generations.
Strengthening Roots
A high level of external debt makes a country economically vulnerable, particularly when the debt is denominated in foreign currencies (70% at the end of March 2023). Fluctuations in exchange rates can significantly impact the cost of servicing these debts, making repayment more onerous during periods of depreciation. India witnessed this vulnerability during the 2013 Taper Tantrum and the recent economic disruptions due to the pandemic, both of which caused fluctuations in the rupee exchange rate. Also, the interest payments on external debt can deplete foreign exchange reserves. Hence, measures need to be taken to strengthen the rupee by reducing the current account deficit and attracting more foreign investments into the local equity markets.
When a country borrows heavily from foreign entities, those entities can start to dictate the terms and conditions of one’s trading policies or even political pronouncements. This could result in policies dictated by external interests rather than those aligned with our country’s own long-term growth and development objectives.
Burden on Households
Recent Reserve Bank of India’s data on households’ financial assets and liabilities up to 2022-23 show a fall in net financial assets of households as a share of GDP, with the number falling from 7.9% in FY19 to 5.1% in FY23, despite being at a high of 11.5% in FY21. From FY19 to FY21, savings increased due to less spending during the Covid pandemic. But, once the economy opened up, not only did spending increase but also it was on the back of higher inflation caused by raised taxes to finance external debt repayments. Hence, people could not save much.
Another factor that sets Indians apart is their savings plan and how they invest in the education of their children – a trait seized upon by universities across the world. However, it remains a determining factor for future generations studying and working in other countries and sending back home some of those earnings. How can anyone forget how Kerala saved itself from the major 2018 flood crisis through money received from Indian nationals living in other countries?
In conclusion, we can say that India’s external debt is undeniably a matter of concern, given its scale, potential impacts on future generations, economic vulnerability, implications for sovereignty, and the significant drain on financial resources through interest payments. Addressing the concerns related to external debt requires a multi-faceted approach. Structural reforms in fiscal policies, such as prudent fiscal management, encouraging foreign direct investment (FDI), boosting exports and prioritising sustainable development initiatives can reduce this burden. Striking a balance between utilising debt as a financial tool and ensuring fiscal sustainability is vital for India’s continued economic progress and stability.
