Tuesday, 16 Sep, 2025
While at a first glance, India's debt looks massive, but is not a cause of concern
Earlier this month, the Reserve Bank of India (RBI) released its annual report that showed an increase in country's debt burden by USD 47.1 billion to USD 620.7 billion in the financial year 2021-22. According to the report, a large pile of external debt is coming up for redemption this year. More than 40 percent or $267 billion worth of external debt is due for repayment in the next nine months. This is equivalent to 44 percent of India's foreign exchange reserves. This has led to some analysts stoking fears with flippant references to neighbouring Sri Lanka where a major debt crisis has pushed into bankruptcy and sovereign default.
However, this parallel between India and Sri Lanka is not only misplaced but also overblown.
Why countries takes loan?
For a developing country like India, the government is required to propel growth through sufficient fund allocation in infrastructure and other essential resources. The need for government to spend on welfare to address issues like poverty, malnutrition and illiteracy and the ongoing pandemic also adds an additional burden. Hence, large amounts of borrowings are needed to fill the revenue – expenditure gap.
Why we should not worry about India’s debt
While at a first glance, India's debt looks massive, but is not a cause of concern. It is true that payment of $267.7 billion of debt is due in less than a year, but the Centre’s share in this is just $7.7 billion or less than 3 per cent. Thus the debt level of the government is very much manageable and stands out safe. Our huge stockpile of foreign exchange reserves provides a cover of 10 months of imports projected for 2022-23.
To understand how capable a country is in paying its debts, we need to take a look at its debt-to-GDP ratio. By comparing what a country owes with what it produces, the debt-to-GDP ratio reliably indicates that particular country's ability to pay back its debts. Since 1991, successive governments have gradually opened up the country’s capital markets, expanding the stock of external debt from $83.8 billion in 1991 to $620 billion in 2021. Despite a massive increase in the quantum of external debt, the (external) debt-to-GDP ratio has remained stable, infact declining from 37.3 per cent in 1992 to around as low as 16.8 per cent by end March 2006. As of 2021, the external debt-to-GDP ratio stands at 19.9 per cent.
Moreover, the composition of the debt has an important role to play not only in understanding the after effects of such volatile shocks but also in analysing the sustainability of a country’s debt. If we analysis the recent RBI data, the share of outstanding debt of non-financial corporations in total external debt is the highest followed by deposit-taking corporations. The share of government debt (external borrowings by public sector/sovereign debt) is quite low. It stands at 21%, declining from 48 percent in 2000. On the other hand, share of private and financial sector has shown a rapid increase.
Overall, India's public debt-to-gdp ratio is much lower than other countries. France, Canada, the UK and others. Brazil, an emerging market economy, has 91.9 percent gross public debt. Countries such as Japan (262%), Greece (185%), Italy (150%), United States (125%) has a much larger ratio than India.
So next time when you hear sensational news story on India’s rising debt it should be taken with pinch of salt.
