What is external debt ?
- External debt is the money that borrowers in a country owe to foreign lenders.
- While external debt may be denominated in either the rupee or a foreign currency like the U.S. dollar, most of India’s external debt is linked to the dollar. This means Indian borrowers will have to pay back their lenders by first converting their rupees into dollars.
Extent of India's external debt :
- India’s external debt was $ 513.4 billion at the end of December 2017, an increase of 8.8% since March 2017.
- Most of it was owed by private businesses which borrowed at attractive rates from foreign lenders.
- To be precise, 78.8% of the total external debt ($404.5 billion) was owed by non-governmental entities like private companies.
- The size of external commercial borrowings and foreign currency convertible bonds, which represents Indian companies’ foreign borrowings, has risen from Rs. 99,490 crore at the end of December 2015 to Rs.1,72,872 crore at the end of December 2017.
Are there any risks involved in foreign borrowings ?
There are two major risks involved in foreign borrowings.
- There could be unexpected changes in the interest rates charged on these loans.
- This can, for instance, cause widespread default when rates rise as borrowers may not be able to make higher interest payments, thus raising the risks of a systemic crisis.
- An unexpected fall in the value of the rupee, for instance, can cause severe difficulties for Indian companies that need to pay back dollar denominated loans as they will now have to shell out more rupees than they had previously estimated to buy the necessary dollars.