India’s Gross Domestic Product (GDP) has increased by 5.7% in the April-June quarter, up from 4.6% increase recorded in the last quarter, according to a finance ministry release.
The ministry also released the external debt figures which stood at $ 440.6 billion on March 2014, showing an increase of 7.6% over last year.
External debt is defined as the outstanding amount of current liabilities of principal and interest to creditors such as multilateral, bilateral organisations and amount owed to non-residents of the economy.
HT analysed India’s external debt from 2005 till 2014 and found that India’s external debt increases by almost 8% (geometric mean) on an average every year.
In 2005-06, external debt was $ 139 billion, which increased to US$ 440 billion in March 2014, a decadal jump of approximately 30%.
In March, 2014, external debt formed 23% of GDP, which was an increase of 4.5% over the previous year when it was 22%.
During the recession of 2008, external debt barely grew due to stringent international credit constraints which increased the cost of borrowing, fall in aggregate demand and capital inflows.
When compared with twenty most indebted developing countries from around the world, in the terms of absolute external debt in 2012, India takes the third position behind China and Brazil.
While compared in terms of external debt to gross national income (GNI), India takes 17th position among the twenty developing countries.
Relatively, the external debt to GNI ratio is a better indicator of the comparison because the sizes of economies differ for each country.
Thus among the developing countries when the external debt to GNI ratio is taken into account, India is in a better position.
Why external debt doesn't spell doom?
External debt is crucial for developing countries facing capital constraints as it helps them close the gap between domestic savings and investment.
The key is to manage the debt well, as an excess of debt obligations will restrain future growth. India follows a prudent debt management policy that focuses on monitoring long and short term debt, regulating external commercial borrowings and interest rates on NRI deposits.
Story ideation: Shourjya Bhowmick
Reasearch : Shreya Chatterjee
Visualization : Vignesh Radhakrishnan
Source: IMF, Financial services website, World Bank