Internal Debt and External Debt

Internal debt is that part of the total debt that is owed to lenders within the country. It is the money the government borrows from its own citizens. The government borrows by issuing the Government Bonds and T-Bills (Treasury Bills). It also includes the Market borrowings by the government. The government bonds and T-Bills are traded in the market which is also known as Gilt Market. When government borrows from the domestic sources, the increase in inflation is less in comparison to simply printing the money.

External Debt

External debt is owed to creditors outside the country. The outsider creditors can be foreign governments, International Financial Institutions such as World Bank, Asian Development Bank etc., corporate and foreign private households. External debt may be of several kinds such as multilateral, bilateral, IMF loans, Trade credits, External commercial borrowings etc. When the non-resident Indians park their funds in India, it is also a type of external debt and is called NRI deposits. If the external debt is denominated in Indian Rupee, it is called Rupee Debt.

India’s Current Debt Position

The outstanding internal and external debt and other liabilities of the Government of India at the end of 2016-2017 is estimated to amount to Rs. 74,38,181.45, as against Rs. 68,91,913.58 crore at the end of 2015-2016(RE). The following table shows the current position on 31st March, 2017.

For your examinations, there are some important observations regarding debt position of India. Most of India’s debt is internal (97%) and we are not under huge external debt. India fares much better than its BRICS counterparts except China. Further, India’s borrowing from the International Monetary Fund has been falling since 2014. This is quite comfortable position because despite liberalization, privatization and globalization that set in in 1991, Indian Economy has not fallen into the trap of external debt.

Per Capita Debt

There has been a rise in the per capita debt on March 31, 2016 as compared to March 31, 2015. There has been a rise of 9.2% in per capita total debt (internal and external) as on March 31, 2016 as compared to March 31, 2015. The per capita internal debt increased by 9.3% while per capita external debt increased by 5.1% during the given period. In absolute terms, the per capita total debt increased by Rs. 4,525/-, per capita internal debt by Rs.4,446/- and per capita external debt by Rs.80/- during this period.

External Debt Sustainability

Every country needs to meet its current and future external debt service obligations. If these obligations are met in full, without recourse to debt rescheduling or the accumulation of arrears and without compromising growth – then it would be called external debt sustainability. If not, then the condition would be called a debt burden. The external debt sustainability can be measured by several indicators such as Debt to GDP ratio; Foreign debt to exports ratio; Government debt to current fiscal revenue ratio etc. Further, external debts can be generally paid via exports and thus huge external debt puts undue pressure on exports.

Sovereign Default

A failure or refusal of the government of a sovereign state to pay back its debt in full is called Sovereign Default. Sovereign Default may be accompanied by a formal declaration of a government not to pay (repudiation) or only partially pay its debts (due receivables), or the de facto cessation of due payments.