India’s external debt has grown rapidly over the past few years, raising alarms among economists and ordinary citizens alike. Data from the Reserve Bank of India (RBI) show that by June 2025 the country’s outstanding external debt rose to USD 747.2 billion, which is USD 11.2 billion more than the level recorded at end‑March 2025. This surge pushed the external debt‑to‑GDP ratio to 18.9 %, only slightly below 19.1 % at the end of March. Earlier, by December 2024 the debt had already touched USD 717.9 billion, an increase of 10.7 % over the previous year. Non‑government borrowers, particularly large industrial corporations and deposit‑taking corporations, held more than half of this debt, and servicing costs consumed 6.6 % of the country’s current receipts.
These numbers may appear abstract, but they translate into real pressures on India’s economy and its citizens. Rising external debt means larger repayments in foreign currency, dependence on volatile global interest rates and foreign exchange markets, and less fiscal space for social spending. The concern is not merely the absolute amount; it is also the speed of accumulation, the composition of the debt and the policy choices that fuel it.
Why India’s external debt situation is worrying; is it a combination of corporate borrowing, policy missteps, and unnecessary government spending that has pushed the country towards a precarious external position?
What Counts as External Debt?
External debt includes all liabilities that residents of a country owe to non‑residents, whether these are governments, corporations or individuals. India’s external debt is made up of two broad components:
- Sovereign external debt (SED) – Liabilities incurred by the central government and its guaranteed entities (such as borrowing under multilateral and bilateral loans, defence debt, sovereign bonds and allocations of special drawing rights). In March 2023, sovereign debt accounted for about 21 % of India’s external debt and stood at USD 133.3 billion.
- Non‑sovereign (non‑SED) debt – Liabilities of private corporations, deposit‑taking corporations and other financial institutions. In March 2023, these entities held 78.7 % of the external debt, an increase of 0.6 % over the previous year.
External debt can also be classified by maturity and currency. Long‑term debt (maturity longer than one year) represented 79.4 % of the debt stock in March 2023, while short‑term debt, largely trade credit and foreign investors’ holdings of treasury bills – was 20.6 %. The currency mix matters because depreciation of the rupee against foreign currencies increases the burden of repayment. US‑dollar denominated debt makes up roughly 54–55 % of India’s external debt, and rupee‑denominated debt just under 30 %.
A Short History: The External Debt Roller‑coaster
1991 – Crisis and the Slow Path to Stability
India’s external sector came into focus during the 1991 balance‑of‑payments crisis, when the external debt‑to‑GDP ratio exceeded 28 %. Severe shortages of foreign currency reserves forced the government to mortgage gold and accept an IMF‑backed structural adjustment programme. A combination of economic liberalisation, current‑account controls and prudent debt management gradually brought the ratio down to 17 % by 2006. This period also saw increased foreign investment and moderate export growth, which reduced reliance on foreign borrowing.
2010s – Borrowing Rebounds
After the global financial crisis, India pursued ambitious infrastructure and energy projects, encouraging companies to tap into cheaper global funds. The external debt‑to‑GDP ratio climbed again, rising above 23 % by March 2015. However, the growth in debt mostly reflected private borrowing. Non‑sovereign debt accounted for about four‑fifths of the total, and commercial lenders became the largest creditors, holding roughly 36–37 % of outstanding debt. The RBI responded with a calibrated approach to external commercial borrowings (ECB), imposing caps on borrowing amounts, end‑uses and maturities.
2020s – Pandemic, Monetary Stimulus and a New Surge
The COVID‑19 pandemic triggered a fall in exports and capital outflows in 2020. India’s external debt remained relatively stable, but the composition shifted unfavourably. Short‑term debt (mostly trade credit) rose to 19.6 % of total external debt by March 2022, up from 17.6 % a year earlier. This jump was largely due to a surge in import‑related trade credit as companies rushed to secure supplies during the pandemic. Meanwhile, foreign exchange reserves, which act as a buffer, fell to 97.8 % of external debt.
The easing of pandemic restrictions in 2021–22 led to a rebound in import demand and external borrowing. The external debt stock reached USD 624.7 billion by March 2023, a marginal rise of 0.9 % over the previous year. Importantly, the external debt‑to‑GDP ratio fell to 18.9 %, down from 20 % a year earlier.
2024–25 – Record Borrowing and the Valuation Effect
The years 2024 and 2025 witnessed an acceleration in external borrowing. According to Finance Ministry data, the external debt stock rose to USD 717.9 billion by December 2024, representing a 10.7 % increase over December 2023. A significant portion of this rise was a valuation effect caused by the appreciation of the US dollar. The ministry estimated that US‑dollar strengthening added USD 12.7 billion to the debt stock in the quarter ending December 2024.
By June 2025, the RBI reported that external debt stood at USD 747.2 billion, up USD 11.2 billion from end‑March. Although the debt‑to‑GDP ratio moderated slightly to 18.9 %, the sheer magnitude of borrowing and the shift towards corporate liabilities raised fresh concerns. Long‑term debt rose to USD 611.7 billion, while the share of short‑term debt (original maturity up to one year) declined marginally to 18.1 %. However, on a residual maturity basis, which accounts for future repayments falling due in the near term short‑term debt constituted 40.7 % of total external debt, underscoring liquidity risks.
Anatomy of India’s External Debt
Currency Composition: A Strong Dollar Hurts
The dominance of the US dollar means that rupee depreciation can dramatically inflate India’s debt burden. In December 2024, US‑dollar‑denominated debt made up 54.8 % of the total debt stock, while the share of Indian‑rupee debt was 30.6 %. By June 2025, the RBI noted that the dollar share had eased slightly to 53.8 %, but it remained the largest component. Because India’s export revenues are predominantly in dollars, a stronger dollar simultaneously increases debt obligations and erodes export receipts.
Sectoral Composition: Non‑Government Borrowers Dominate
Non‑government borrowers hold the majority of India’s external liabilities. Non‑financial corporations accounted for roughly 36 % of the debt stock in December 2024. Deposit‑taking corporations (such as banks) held about 27.8 %, while the central government held 22.1 %. In June 2025, a similar pattern persisted: the non‑financial corporate sector held 35.9 % of the debt, deposit‑taking corporations 27.4 %, and the general government 22.5 %.
This composition matters because private borrowers do not enjoy sovereign immunity; they face market interest rates and foreign exchange risk. The government does not directly control their borrowing decisions but may ultimately feel pressure to support troubled firms, especially systemic ones (e.g., large conglomerates). When these companies borrow abroad in dollars or yen, any rupee depreciation increases their repayment burden.
Maturity Structure: Short‑Term Pressures
Although long‑term debt constitutes the lion’s share, short‑term obligations are sizeable. In March 2023, short‑term debt by original maturity accounted for 20.6 % of total external debt. A year earlier, it was 19.6 %, indicating a rising trend. By June 2025, short‑term debt (original maturity) fell slightly to 18.1 %, but on a residual basis (which counts the upcoming repayments on long‑term debt), it represented 40.7 % of the debt stock. This means that nearly half of India’s external debt will need to be serviced or refinanced within the next one to three years, a significant liquidity risk if global financial conditions tighten.
Instrument Composition: Loans and Trade Credit
Loans remain the dominant instrument. 33–35 % of India’s external debt stock is in the form of loans. Currency and deposits account for roughly 23 %, trade credit and advances around 18 %, and debt securities (bonds) about 17 %. Since trade credit is typically short term, its growth during import surges increases rollover risk. Concessional debt, loans from multilateral and bilateral agencies at below‑market rates, makes up only 8 %, suggesting that much of the recent borrowing has come through commercial channels at market rates.
Why the Rise in External Debt is Concerning?
Surge in External Commercial Borrowings
India’s private sector has embraced foreign borrowing with unprecedented enthusiasm. The Times of India reported that Indian companies secured USD 11 billion in external commercial borrowings (ECBs) in March 2025, the highest monthly inflow in more than five years. For the full fiscal year FY25, ECB proposals totaled USD 61.8 billion, a sharp rise from USD 49 billion in FY24. Major borrowers included Foxconn’s subsidiary Yuzhan Technology, JSW Steel (USD 900 million), Power Finance Corporation, IndianOil, and even state‑run nuclear and semiconductor companies.
The surge reflects optimism about India’s growth prospects but also exposes companies to currency risk. Many of these loans are denominated in dollars or yen. If the rupee weakens sharply, corporate balance sheets could be strained, potentially prompting bailouts or government intervention. ECBs are also used to refinance earlier borrowings, indicating a rolling‑over of debt rather than new investment. This pattern resembles the classic warning sign of a debt trap, new loans taken to repay old ones.
Rising Short‑Term Debt and Trade Credit
Short‑term debt is particularly risky because it must be rolled over frequently. The RBI’s 2021–22 report noted that the short‑term debt ratio jumped to 19.6 % of total external debt due to surging imports. Although the ratio eased slightly in subsequent years, the residual‑maturity measure shows that 40.7 % of external debt will need repayment within the next year or so. Much of this comprises trade credit and ECBs, making India vulnerable if global trade slows or foreign lenders become risk‑averse.
Dollar Appreciation and Valuation Effects
The strong dollar has inflated India’s debt burden. The Finance Ministry noted that US‑dollar appreciation added USD 12.7 billion to the external debt stock in the quarter ending December 2024. While valuations can reverse when the dollar weakens (as seen in June 2025 when depreciation caused a USD 5.1 billion valuation loss), the trend of a strong dollar amid global monetary tightening remains a threat. As the rupee loses value, more domestic resources are needed to service the same dollar‑denominated debt.
Declining Reserve Cover
India’s external debt is considered manageable partly because of its large foreign exchange reserves. However, the ratio of reserves to external debt has been falling. In March 2022, reserves covered 97.8 % of external debt, down from 100.6 % a year earlier. By March 2023, the coverage dropped further to 92.6 %. This means that in the event of sudden capital outflows or a spike in import prices, India would have less cushion to meet its external liabilities. A comfortable reserve cover is crucial to maintaining investor confidence and preventing a currency crisis.
Predominance of Non‑Concessional Debt
Concessional loans from multilateral and bilateral agencies provide longer maturities and lower interest rates. Yet, concessional debt accounts for only about 8 % of India’s external debt. The rest is at market rates, often floating and subject to global interest movements. With interest rates in advanced economies rising to combat inflation, servicing costs for India’s external debt will increase. Debt servicing already consumes 6.6 % of the country’s current receipts, and any further rise could divert revenue away from social spending.
India’s Optimal Debt Threshold is Near
Research cited by the RBI suggests that India’s growth‑maximising external debt‑to‑GDP ratio lies between 23 % and 24 %. Beyond this threshold, the marginal impact of additional debt becomes negative due to the “debt overhang”, the expectation that future taxes will be used to repay debt, which discourages investment and growth. India’s ratio of roughly 19 % appears below this threshold, but rapid borrowing could close the gap. The value of this debt is also increasing. The external debt stock jumped by more than USD 100 billion between March 2023 and June 2025, underscoring the speed at which India is approaching its optimal limit.
Policy Failures and Misplaced Spending
While macroeconomic factors like global interest rates and exchange rates play roles, policy choices have exacerbated India’s external debt problems. A combination of lax regulation of corporate borrowing, under‑performing export policies and extravagant government spending on prestige projects has contributed to the debt build‑up.
Failure to Build a Strong Export Base
A robust export sector is essential to servicing external debt because foreign earnings provide the means to repay. Despite initiatives such as “Make in India” and Production‑Linked Incentive (PLI) schemes, India’s merchandise exports have struggled to keep pace with imports of crude oil, electronics and gold. Services exports, notably IT and business process outsourcing, have performed better, but they cannot fully offset the merchandise trade deficit. Without a structural shift towards high‑value manufacturing exports, India remains dependent on foreign capital to finance its current account deficit.
Liberalisation of External Borrowing without Adequate Safeguards
The RBI has gradually relaxed limits on external commercial borrowings to encourage investment. While this has provided companies with cheaper capital, it has also enabled a surge of short‑term and unhedged borrowing. The RBI’s 2022 report emphasised a “calibrated approach” to ECBs, including restrictions on end‑use and cost. Yet, subsequent policy announcements have raised the automatic route limit from USD 750 million to USD 1.5 billion per year and allowed more sectors to borrow without approval.
The result is evident in the record USD 11 billion in ECBs approved in March 2025. Many borrowers used these funds not for greenfield investments but to refinance existing debt or meet working capital needs. Liberalising borrowings without ensuring that they finance productive exports has deepened India’s exposure to currency and rollover risks.
Vanity Projects and Extravagant Spending
Perhaps the most glaring policy failure is the government’s prioritisation of prestige projects over critical social infrastructure. Several big‑ticket initiatives have diverted public funds and indirectly increased the need for external borrowing.
Central Vista Redevelopment
During the pandemic in 2020, when hospitals lacked oxygen cylinders and migrant workers were walking back to their villages, the government proceeded with a new Parliament building and redevelopment of Delhi’s Central Vista. A commentary in Peoples Democracy likened the project to authoritarian architectural extravagance and criticised the decision to divert funds during a public health crisis. The article noted that “A sum of Rs 20,000 crore will be spent” on the redevelopment and that architects expect actual spending to reach nearly Rs 30,000 crore. This is equivalent to USD 3–4 billion, not a small amount in a country struggling with a widening fiscal deficit.
The project includes not only a new triangular parliament building inspired by the Sri Yantra but also demolition of existing secretariat buildings, construction of a new prime minister’s residence and an underground tunnel. Critics argue that the plan lacks transparency and diverts funds from public health and education. Given the sheer scale, financing such an endeavour inevitably means borrowing, often through external channels, thereby swelling non‑productive debt.
Bharat Mandapam and G20 Overspending
In 2023, India hosted the G20 summit in Delhi. To showcase the country’s rising stature, the government built the Bharat Mandapam, a gigantic convention centre at Pragati Maidan. According to its official description, Bharat Mandapam cost around Rs 2,700 crore (approximately USD 320 million). It was built on the site of the historic Hall of Nations, which was demolished despite ongoing court proceedings, sparking public outcry.
The expenses did not stop at construction. A report by National Herald revealed that India’s spending for the G20 summit “was reportedly as high as Rs 4,100 crore”. Initially, the government had budgeted Rs 990 crore, but spending reached four times the original budget. The report noted that of Rs 4,110.75 crore, Rs 3,600 crore was attributed to the India Trade Promotion Organisation (ITPO), essentially the cost of constructing the Bharat Mandapam venue. Even if some of the infrastructure will be used in future, the scale of overruns raises questions about fiscal priorities. Such extravagance intensifies the need for financing (often through borrowing) and leaves less room for essential sectors.
Statue of Unity
The government also spent heavily on symbolic projects such as the Statue of Unity in Gujarat. Wikipedia reports that construction of the statue began in 2013 under a public–private partnership and that the total cost of the project was estimated to be around ₹2,063 crore (₹33 billion or roughly USD 390 million). The contract for design, construction and maintenance was awarded for ₹2,989 crore (about ₹48 billion or USD 560 million). While the statue has become a tourist attraction, its enormous cost symbolises a prioritisation of prestige over pressing economic needs.
When public funds are tied up in such ventures, the government often turns to external borrowing to finance basic infrastructure and social programmes. The result is a rising external debt burden without commensurate productive assets or export revenues.
Underinvestment in Health, Education and Manufacturing
At the same time as money flows into vanity projects, critical sectors remain underfunded. Public health expenditure in India has hovered around 1.5 % of GDP, far below the global average for comparable economies. Education spending is also low. Failure to invest in human capital reduces productivity growth and limits the economy’s capacity to generate foreign exchange through high‑value exports. Consequently, the government and private sector resort to external borrowing to fund infrastructure and consumption, perpetuating the debt cycle.
Mismanagement of Current Account and Exchange Rate
India runs a persistent current‑account deficit because it imports more goods and services than it exports. This deficit has historically been financed through capital inflows like foreign direct investment, portfolio investment and external borrowing. However, FDI inflows have plateaued in recent years, and portfolio inflows are notoriously volatile. The government has sometimes resorted to administrative measures (such as restrictions on gold imports) to curb the deficit, but these are not sustainable. Meanwhile, the rupee’s exchange rate policy remains a delicate balancing act, where a depreciating rupee boosts exports but increases the local cost of servicing external debt. The central bank’s efforts to defend the rupee by selling dollars can erode foreign reserves, further weakening the reserve cover.
Broader Implications of Rising External Debt
Crowding Out of Social Spending
As external debt grows, servicing costs, interest and principal repayments, consume a larger share of government revenue. In December 2024, debt servicing absorbed 6.6 % of current receipts. Every rupee spent on external debt service is a rupee less for schools, hospitals or rural development. The problem is exacerbated when the borrowed funds are not invested in productive projects that generate future revenue. Vanity spending and inefficient subsidies do not create the earnings needed to repay debt; they only widen fiscal deficits and necessitate more borrowing.
Vulnerability to External Shocks
High external debt makes India vulnerable to global financial shocks. A sudden rise in US interest rates or a flight to safety could trigger capital outflows and raise borrowing costs. Because 40.7 % of external debt (by residual maturity) falls due in the near term, any disruption in global liquidity could lead to refinancing difficulties. Moreover, if commodity prices spike (as happened with crude oil), India’s import bill would balloon, requiring more foreign currency and potentially pushing the rupee down further. With declining reserve cover (from 100.6 % of debt in March 2021 to 92.6 % in March 2023), there is less buffer to absorb shocks.
Corporate Balance‑Sheet Risks and Moral Hazard
The predominance of non‑sovereign external debt means that corporate balance sheets carry substantial foreign currency liabilities. When large, systemically important firms borrow abroad without adequately hedging against currency risk, a sharp depreciation can render them insolvent. The 1997 Asian financial crisis offers a cautionary tale where over‑leveraged corporations in Thailand and Indonesia collapsed when their currencies depreciated, forcing governments to bail them out. India is not immune. Should a wave of corporate defaults occur, the pressure on the government to provide rescue packages would effectively transfer private losses to the public sector, aggravating sovereign debt.
Debt Overhang and Growth Prospects
The RBI’s research on debt thresholds suggests that India’s external debt should stay below around 23–24 % of GDP to avoid negative growth effects. As the ratio edges closer to this threshold, investors may worry about debt sustainability, leading to higher risk premiums. Higher borrowing costs could crowd out private investment and dampen the economic momentum that India needs to maintain in order to create jobs for its young population.
India stands at an inflection point. The country’s external debt has soared past USD 747 billion, with corporate borrowings and expensive vanity projects driving the increase. While the debt‑to‑GDP ratio is still below the growth‑maximising threshold of 23–24 %, the rapid growth of debt, rising short‑term obligations and shrinking reserve cover signal vulnerability.
The government has pursued a dual strategy of encouraging private companies to borrow abroad and simultaneously engaging in large‑scale projects whose economic returns are dubious. Rs 20,000–30,000 crore for the Central Vista redevelopment, Rs 2,700 crore for the Bharat Mandapam, Rs 4,100 crore on G20 extravagance and nearly ₹3,000 crore for the Statue of Unity, not to mention other uncosted prestige projects, illustrate misallocation of scarce resources.
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India cannot afford to ignore these warnings. The price of complacency could be a debt trap that constrains future generations, forces austerity and impedes inclusive growth. A comprehensive strategy that boosts exports, regulates external borrowings, enhances social investment and curtails unnecessary spending is urgently needed. Doing so will not only alleviate the external debt burden but also pave the way for sustainable and equitable development.
