India’s External Debt Records Sharpest Seven-Year Rise in FY25

India’s External Debt Records Sharpest Seven-Year Rise in FY25

Why in News? 

Recently, India’s external debt has recorded $736.3 billion, its steepest rise in the last seven years as per the latest “External Debt Status Report 2024-25” released by the Union Finance Ministry.

Key Highlights of External Debt Status Report 2024-25

• External Debt Level: India’s total external debt reached $736.3 billion at the end of March 2025, which shows an increase of more than 10 percent compared to March 2024, when the debt stood at around $660 billion. In Rupee terms, the debt was estimated at ₹63 lakh crore, recording a rise of ₹7.3 lakh crore over the previous year.

• Debt-to-GDP Ratio: The debt-to-GDP ratio for India as of March 2025 was 19.1 percent, which marks a rise of about 60 basis points over the previous year. The country’s foreign exchange reserves provided a strong buffer, as the reserves covered nearly 90.8 percent of the external debt at the end of FY25.

• Long & Short Term Debt: The Long-term external debt accounted for 81.7 percent of the total at the end of March 2025, while short-term debt formed the remaining 18.3 percent. Within short-term borrowings, trade credit for imports formed a dominant part with a 96.8 per cent share, reflecting the crucial role of trade in the short-term debt structure.

• Borrowers: Among different sectors, non-financial corporations were the largest borrowers, with outstanding external liabilities of around $261.7 billion by March 2025. Access to foreign debt mainly came through loans which contributed 34 percent, followed by currency and deposits at 22.8 percent, trade credits at 17.8 percent, and debt securities at 17.7 percent.

• Valuation: The report highlights the valuation effect due to the appreciation of the US Dollar against the Indian Rupee and other currencies. This factor alone added about $5.3 billion to the debt figures. Without the valuation effect, the external debt would have gone up by $72.9 billion instead of $67.5 billion during the year.

• Creditors: The biggest creditors were commercial lenders, holding 39.6 percent of India’s total external debt as of March 2025. They were followed by NRI depositors who accounted for 22.4 percent of the borrowings.

• Currency Composition: The report points out that the US Dollar remained the largest currency component of India’s external debt with a 54.2 per cent share at the end of March 2025. The Indian Rupee came second, forming 31.1 percent of the total debt. Other currencies included the Japanese Yen with 6.2 percent, the Special Drawing Rights (SDR) with 4.6 percent, and the Euro with 3.2 percent.

• Concessional Debt: The concessional debt as part of total external debt showed a decline. It stood at 6.9 percent in March 2025, compared with 7.4 percent in March 2024. The falling share of concessional debt indicates greater reliance on commercial borrowings than on low-cost or subsidized credit sources.

What is External Debt?

• About: External debt is the total money that a country borrows from foreign lenders, including governments, international institutions, and private creditors, to meet its financial requirements. It represents both long-term and short-term borrowings. The debt is usually raised in foreign currency, which makes repayment dependent on the country’s ability to earn foreign exchange. 

• Purpose: The primary purpose of external debt is to provide funds for economic growth and development. Governments often use borrowed funds to invest in infrastructure projects, healthcare, education, and industrial expansion, which generate long-term benefits for the country. External debt is also utilized to meet balance of payments deficits, helping the country pay for imports of essential goods and services. It allows nations to maintain macroeconomic stability. It enables countries to access advanced technology, expertise, and modern equipment by financing imports and industrial projects.

• Role in Economy: External debt helps bridge the gap between domestic savings and investment requirements. By borrowing from foreign sources, a country can maintain foreign exchange reserves, which are essential for stabilizing its currency and meeting international payment obligations. It also influences monetary and fiscal policy. Efficient management of external debt ensures that borrowed funds are used productively, generating returns that exceed the cost of borrowing. It affects a country’s debt sustainability indicators, including debt-to-GDP ratio and debt service ratio.

Types of External Debt

External debt can be classified into several categories based on the source, terms, and repayment conditions.

• Bilateral Debt: Bilateral debt (Sovereign Debt) is the money borrowed directly from another country under an agreement. The lending country provides funds at concessional rates or on easier terms to support development projects or economic growth. India has received bilateral loans from Japan, the United States, and Germany for infrastructure projects.

• Multilateral Debt: Multilateral debt is borrowed from international organizations such as the World Bank, International Monetary Fund (IMF), and Asian Development Bank (ADB). These loans are often used to finance large development projects that require long-term investments like urban development and social welfare programs.

• Short Term Debt: External debt is also classified by maturity period. Short-term debt is repayable within one year, and it mainly includes trade credits, bank loans, and import financing. Short-term debt is highly liquid but can create pressure on foreign exchange if not managed properly. 

• Long Term Debt: Long-term debt has a maturity period exceeding one year and is used to finance large infrastructure and development projects. At the end of March 2025, India’s long-term debt accounted for 81.7 per cent of total external debt, highlighting the stability of borrowing patterns.

• Non-Sovereign Debt: Commercial borrowings are loans raised from foreign commercial banks and financial institutions at market-determined interest rates. These loans are more expensive because they carry higher interest and shorter repayment periods.

India’s External Debt Management

• India’s external debt is managed carefully by the Ministry of Finance and the Reserve Bank of India (RBI) to maintain economic stability and ensure sustainable growth. 
• The government monitors both long-term and short-term borrowings and emphasizes borrowing on concessional terms whenever possible. 
• The management strategy also includes regulating external commercial borrowings (ECBs) and monitoring NRI deposits, which form a significant part of the country’s overseas liabilities.
• The Department of Economic Affairs (DEA) in the Ministry of Finance is responsible for compiling and releasing reports on India’s external debt. It publishes quarterly updates and annual status reports to provide an accurate picture of the country’s borrowings. 
• The External Debt Management Unit (EDMU) within the Ministry of Finance assists in preparing these reports. These updates cover the total debt, maturity profile, currency composition, and debt service obligations.
• India’s external debt consists of different types: Commercial borrowings (CBs) are loans taken by Indian businesses from foreign commercial banks and institutions. NRI deposits represent funds deposited by Non-Resident Indians in Indian banks, which also contribute to the country’s external debt. Rupee-denominated debt includes loans from non-residents in Indian currency.
• The RBI also plays a key role by collecting statistics, particularly for the first two quarters of the calendar year, and by managing foreign exchange reserves to meet debt obligations.

Challenges in Managing External Debt

• Exchange Rate: Most of India’s external debt is denominated in foreign currencies, primarily the US Dollar, Japanese Yen, and Euro. When the Indian Rupee Depreciates, the cost of servicing these loans rises in domestic terms. Such fluctuations make repayment planning difficult and can increase the debt burden unexpectedly.

• Global Finance: Changes in global financial conditions also affect India’s external debt management. Rising global interest rates increase the cost of borrowing from international markets, particularly for commercial borrowings and trade finance. Limited access to international capital markets during turbulent periods can increase pressure on domestic financial resources.

• Inflation: Rising inflation in India can increase domestic interest rates, slowing down economic growth and increasing the debt-to-GDP ratio. It also reduces investor confidence and can increase the cost of future borrowings from international markets.

• Geopolitical Tensions: External shocks such as geopolitical tensions, changes in global trade policies, or sanctions pose serious risks to external debt management. For example, disruptions in global trade or an unexpected rise in crude oil prices can increase import bills, reduce foreign exchange reserves, and raise the country’s short-term debt-to-reserve ratio.