Introduction
India’s financial landscape is evolving, with notable changes in its external debt and current account deficit. Let’s break down the key details in a simpler, more understandable way.
External Debt Overview
External debt, which includes loans from various sources, increased by $4.7 billion to reach $629.1 billion by the end of the June quarter. However, here’s the good news: when we compare this debt to the size of India’s economy (GDP), it’s actually at its lowest in over 12 years, standing at 18.6%. This means that while the absolute debt increased, it’s relatively more manageable compared to the country’s economic output.
Government and Non-Government Debt
The government’s share of external debt dropped slightly to $132.8 billion at the end of June, down from $133.3 billion in March. This reduction resulted in a lower government external debt-to-GDP ratio, which decreased from 4% in March to 3.9% in June. Non-government debts, on the other hand, increased by 1% to reach $496.3 billion by June-end.
Components of External Debt
Breaking down the external debt, loans from various sources account for a significant portion, totaling $207 billion. Other major components include currency and deposits ($144 billion), trade credits ($119.3 billion), and debt securities ($105.7 billion). The majority of this debt is denominated in dollars (54.4%), followed by the rupee (30.4%), SDR (5.9%), yen (5.7%), and the euro (3%).
Current Account Deficit
India’s current account deficit (CAD), which measures the balance of trade in goods and services, narrowed to $9.2 billion, or 1.1% of GDP, by the end of the June 2023 quarter. This is a positive development compared to the $17.9 billion deficit, or 2.1% of GDP, a year earlier. However, it’s worth noting that the CAD increased compared to the preceding quarter when it stood at $1.3 billion (0.2% of GDP).
The widening of the CAD in the most recent quarter can be attributed to a higher trade deficit, a lower surplus in net services, and a decline in private transfer receipts. It’s expected that the CAD may continue to increase due to a higher trade deficit in July and August and rising crude oil prices.
In summary, while India’s external debt increased in absolute terms, its relative size compared to the GDP is at a 12-year low, indicating a more manageable debt burden. Additionally, the narrowing of the current account deficit is a positive sign, although recent trends suggest it may increase in the coming months.