How does India’s external debt affect you?

Ashraf Engineer

July 16, 2022


Hello and welcome to All Indians Matter. I am Ashraf Engineer.

Over the past few days, images of Sri Lankans storming the Presidential palace and the prime minister’s home in Colombo dominated television channels and newspapers. Sri Lanka is in the grip of alarming economic turmoil caused by crippling government debt and virtually no foreign exchange reserves. The government owes $51 billion and is unable to pay the interest due, leave alone the principal. That’s what led to the collapse of the currency and unmanageable inflation. Fuel, food and every daily essential is now unaffordable for the common Sri Lankan. So, why am I telling you this? It’s because I want to highlight the dangers of rising external debt on economies, especially India. Did you know that more than 40% of India’s external debt, or $267 billion of the total $621 billion, is due for repayment in the next nine months. Reserve Bank of India data shows this amount is equivalent to about 44% of India’s foreign exchange reserves. The rupee has been falling consistently, recording new lows every few days, and it could face further pressure as the record external debt comes up for repayment. What does this mean for you?


To be sure, India’s situation is nowhere close to Sri Lanka’s. Our foreign exchange reserves are way higher, though foreign portfolio investors have been withdrawing steadily, and inflation is pretty high here too. Still, the situation the two countries finds themselves in are not comparable and we’re certainly not going the Colombo way.

That said, our foreign exchange reserves have shrunk over the past year. The RBI sold $41 billion since February to balance the impact of the portfolio withdrawals. As a result, reserves fell to $593.3 billion on June 24 from a peak of $642.5 billion on September 3, 2021. The foreign exchange reserves, which were more than 100% of our external debt in March 2021, fell to 97% of external debt in March 2022. The rupee, meanwhile, has fallen more than 5% against the dollar since December 2021.

Most of us don’t make the connection between national debt and our daily lives, so I’m going to try and do that in this episode.

First of all, as the government diverts tax revenue to repay the debt, there is less money available for critical public services like healthcare, education and roads. Over a period of time, this reduces the quality of life because these services either become less available or their quality deteriorates.

There is also the danger of unexpected changes in the interest rates charged on these loans by the foreign creditors. This would mean higher interest payments, putting further pressure on forex reserves and government finances.

There is another critical effect. As national debt widens, the government’s first concern is to not default on repayment. To do this, it raises the returns offered on treasury securities like government bonds in order to attract more investors. As this rate increases, Indian corporations would be viewed as riskier. This means they would be charged higher interest for the loans they seek. In response, the corporations would be forced to raise prices of their products and services to meet the increased cost of debt servicing. Who’s paying these higher prices? You.

The higher yield on government securities like bonds leads to a rise in home loan interest rates and thus the cost of buying a home. This is because the cost of money in the mortgage lending market is tied to the interest rates offered on government securities.

Here’s how else high yields on government securities affect the corporate sector. Since these securities are risk-free, more people will choose to invest in them rather than corporate debt or equity. This affects corporate growth, their bottomlines and of course job creation.

Meanwhile, the falling value of the rupee can severely hurt Indian companies that need to repay dollar-denominated loans because they would have to shell out more rupees than before to buy the necessary dollars. So, if a company had to repay a million dollars when the rupee was 65 to the dollar, it would have to shell out Rs 6.5 crore. But, if it had to repay the same  million dollars when the rupee was 79 to the dollar, it would have to shell out Rs 7.9 crore. As you can tell, that’s a huge hit.

The government can, of course, simply print more money to pay back what it owes – and countries like Argentina have actually tried that. But, as money supply increases, it means that inflation will rise even further. With the soaring cost of living, it’s not a risk India should take. And, as I said earlier, the debt repayment has not reached crisis levels yet.

What it will require is some deft handling of the economy, a curb on unnecessary spends and a focus on getting growth back to where it should be. This will result in greater revenues for the government, helping it service the debt. Ensuring better tax compliance – without resorting to tax terror in the form of raids and searches – would help too. At this point, raising tax rates is not an option – or at least it shouldn’t be because the common Indian is overburdened anyway.

Instead, the RBI data on India’s debt level should serve as a warning and urgent steps should be taken now rather than when it is too late. I am at pains to stress that there is no crisis yet and we are certainly not in the same boat as Sri Lanka. But it makes sense to learn from the Lankan crisis and get a handle on our external debt before it gets too tough to manage.

Thank you all for listening. Please visit for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at Catch you again soon.