IMF Warns India About India Total External Debt | May Exceed 100% of GDP

India's Debt to GDP Ratio: India's Total External Debt Rising?

The International Monetary Fund recently reported that India's debt-to-GDP ratio would increase 100 percent by 2027-28. In the first place, the finance minister of India rejected this report and even said that many other countries may perform worse than India on this front. Also, to keep her point, she even exemplified that the general government debt has declined from 88% in the financial year 2020-21 to about 81% in 2022-23. Now, the question is- is India's rising debt-to-GDP ratio a concern for the country? If yes, how will it impact India's economy?

Key Highlights

  • India's current debt-to-GDP ratio stands at 81.9%, slightly lower than China's, which is at 83%.

  • In the long term, the Indian government's GDP ratio may trend around 87.50% of GDP in 2024 and 87% of GDP in 2025.

  • High revenue expenditure by the government is one of the reasons for India's high debts.

  • Despite having debt concerns, the IMF still has an optimistic Outlook for India's economy and projects the potential for faster growth if India implements structural reforms better.

What Is India's Debt to GDP Ratio 2024?

If you look at India's debt, it has risen to $629.1 billion by the end of June 2023, implying that they are increasing by $4.7 billion by the end of March 2023. The data released by the Reserve Bank of India in September 2023 also reveals that the external debt GDP ratio has decreased slightly from 18.8% in March to 18.6% in June 2023. If you look at the reasons behind this decline, they are due to the appreciation of the US dollar against major currencies, which has resulted in a valuation effect of $3.1 billion. If we exclude this valuation effect and find the external debt, it would have been $7.8 billion instead of $4.7 billion.

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Is India's Debt a Cause for Concern?

If you look at India's current debt, it is quite high, as it stands at 81.9% of the GDP. It seems quite high because, during the pre-pandemic era in 2019, India's debt was 75%. The reason behind this increase is that India spends more on interest payments. It means India pays a lot of interest on their debts, about 5.4% of GDP. If you include the primary deficit of 3.5% together, it makes 8.8% of interest on its total debt.

However, the bright spot is the rising debt-to-GDP ratio, which is relatively moderate because India has an extended maturity of these debts. Besides that, India has a large domestic debt, denoted in domestic currency. Therefore, these domestic debts mute the risk associated with overall debts. It means India's debt levels are relatively stable at 80% or may reach the concerned level of 100%.

How Does India's High Debt Situation Affect the Economy?

High debts may have adverse consequences on the economy of any country. In the case of India, its higher debts might also negatively affect the economy. Here are a few ways that explain how India's high debts may affect its economy.

1- Interest Payments Limit the Funds

We have already seen that India pays 5.6% of its GDP on interest payments on external debts. It means high levels of interest payments are used to service it. It leaves fewer resources for India to utilize for other economic and social purposes. India is endowed with limited funds for critical areas like infrastructure, education, and healthcare.

2- India Has Limited Fiscal Resources for Other Priorities

India puts a significant portion of its budget into paying interest payments, leaving little for other emerging priorities. This includes climate change mitigation, adaptation, and green transition. As for now, India's net zero target will be left with limited funds if India makes more payments towards interest. 

3- Higher Debt Limits Country's Response to Future Economic Shocks

The high level of debt restricts the government's ability to respond effectively to other economic shocks. It is true that India has managed a considerable fiscal stimulus to respond to the COVID-19 pandemic. However, it has led to long-term effects on higher interest rates. Now, it is a concern for the country to regulate and encourage investments in its bonds. It also cast doubt on the sustainability of its debt, which has limited the government's ability to respond to future economic shocks.

4- Higher Debt Creates Risk for Fiscal Stability

Currently, banks are responsible for holding government securities to meet their Statutory Liquidity Ratios. Risk arises when interest rates increase, leading to rising asset prices. The bright side is that India may find domestic investors willing to hold these assets. Still, if the situation changes, it may increase the risk. India needs to have patient investors to have these assets for the long term – which may control the volatility and reduce the risk of India's financial stability.

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Why Is the Indian Debt-to-GDP Ratio So High?

There are several reasons why India has so high debt. 

1- Response to the Pandemic and Providing Crucial Support

Indian government's primary focus is to support vulnerable households during the pandemic era. Most of its public debt was increased as the government implemented fiscal measures to return to normal after the pandemic.

2- Infrastructure Development and Private-Sector Borrowing

As the investment in physical infrastructure, both in the public and private sectors increased, the overall net borrowings in India also increased. The private sector successfully reduced its leverage before the pandemic, again creating the opportunity to borrow more to invest in other assets.

3- Economic Incentives and Fiscal Promises

India's public debt profile is a concern, but it is also important to consider the economic incentives offered by the Indian government. During state election cycles, governments often make unsustainable fiscal promises where they utilize public resources for short-term political gains. This aspect is often overlooked but significantly contributes to the country's debt.

4- Policy Measures Linked to Borrowing Incentives

The central government has taken positive steps by introducing policy measures as a tide borrowing incentive for reforms. This approach helps to enhance efficiency and performance, which allows states to get access to additional funds. However, it is a constructive move that aligns economic progress with fiscal responsibility.

5- Burgeoning Expenditure on Welfare Scheme

In the last fiscal year, the government allocated around $48 billion to welfare incentives, where the government even subsidized food for 60% of the population. These welfare schemes have added another burden on the country's debt.

Is India in a Debt Crisis?

To rejoin this, we have made two different approaches that delineate why India is or is not in a debt crisis.

  • Why India Is in Debt Crisis,

  • India Is Facing Currency Depreciation,

The Indian rupee is sharply depreciating against the US Dollar. It impacts the accumulation and representation of external debt. If the Reserve Bank of India makes any intervention to stabilise the rupee, it could deplete the foreign exchange reserve. 

  • Looming Threats of Stagflation

 Major economies in the world are facing the threat of stagflation, which could impact the demand for Indian Exports. If there is a decrease in Indian exports, it would adversely affect the country's debt service ratio, which will ultimately make it challenging for India to repay its debts. 

  • Rising Inflation and Interest Rate

 India is going through a phase of inflation in the economy, and prolonged Inflation in the country will lead the Reserve Bank of India to increase interest rates. An increase in interest rates at any level could slow down economic growth, which means the country's debt-to-GDP ratio might also increase.

  • Us Federal Reserve Actions-Threat to India

 If the US Federal Reserve increases domestic rates to control inflation in the country, it means it is a direct threat to other emerging economies, including India. This may reduce foreign exchange reserves, again a downside risk for India. 

  • India Is Not in Debt Crisis,

  • Stable External Debt to Gdp Ratio,

We know a stable external debt-to-GDP ratio is around 60% to 70%. India has surpassed this benchmark and reached about 81%. And despite this continuous growth in India's external debts over the 15 years, it has remained at a sustainable level. India's GDP is continuously increasing, which has offset the growth of its external debts, which has resulted in a manageable external debt-to-GDP ratio.

  • Adequate Foreign Exchange Reserves,

India's exchange reserve is critical to meeting its debt repayment obligation. In 2014, we witnessed a drop in India's foreign exchange reserve to 68.2%; however, in 2021, it rebounded to 100.6%. In 2022, it has again slightly decreased to 97.8%, but India still has sufficient reserves to cover its external debt.

  • India Has a Manageable Debt-Service Ratio

The debt service ratio represents debt payment as a percentage of export earnings. If you look at India's debt service ratio, in 2006, it was 10.1%, and in 2011, it decreased to 4.4%. However, in 2016, it increased to 8%, but now it is around 5.2%, which indicates India is facing no immediate challenge in servicing its debts.

How Much Is India in Debt to the United States of America?

India is among the top 20 countries with the most US debt, and, surprisingly, India has increased the most of the US debt holding over the past years by 16%. As of now, India holds $223 billion in US treasury security. 

The reason behind this increase in US debt is that US treasury securities are the most secure assets in the world. Also, the US government commits to making timely payments, especially during economic uncertainty. The other biggest benefit of holding large amounts of US dollars is that it is a universally accepted currency in international trade and transactions. Also, it provides portfolio diversification and a high rate of return compared to other Government bonds available worldwide.

India's Debt Crisis: Countries and Institutions India Owes Money

India holds the top spot as it borrowed about $39.7 billion from the World Bank at the end of 2021. India's debtors are the union government, State government, corporations, or citizens of India. It also includes money owed to private commercial banks, foreign governments, or international financial institutions, like the World Bank, the International Monetary Fund, the Asian Development Bank, the Asian Infrastructure Development Bank, etc. If you look at India's external debt, it is around $620.7 billion.


India's debt is a complex situation where its debt to GDP ratio has increased, but it is slightly lower than China's. Big financial institutions like the International Monetary Fund have been concerned over India's rising debt-to-GDP ratio, as it has been said it might touch 100% in the coming years. However, when we analyze India's economy and find its opportunities, we find that it can manage its debts by implementing prudent fiscal management strategies, making structural reforms, and focusing on its economic growth.

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Douglas Allan 27 Dec, 2023


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