Impact of External Debt on the Economy of India

Abstract

External debt impact on the developing economies has been a much-debated issue. The shortfall in the revenue generated from tax and non-tax sources of revenue of the government, as well as deficit faced from capital raised from domestic financial institutions, leads to the situation of external debt borrowing. When borrowing from abroad, the interest rate, currency denomination of loan and repayment schedule matters a lot. While some agencies and friendly countries provide loans at a concessional rate for specific projects, other loans are provided at a high rate and are not denominated in the rupee. External debt provides the necessary capital to the government to carry out economic activities, but if not utilized properly for asset building activities it increases the burden of repayment on the government. Many developing economies have fallen into the debt trap which occurs when new debt is taken to repay the old debt. We have tried to study the impact of external debt on factors such as per capita income, expenditure on education, foreign exchange rate, human development index, exports, inflation, defense expenditure, infrastructure expenditure, and capital expenditure in the case of the Indian economy. The study aims to identify the trend of India’s external debt borrowing and to determine whether over the years from 1970 – 2018, this external debt has helped in improving the economic growth of India. We also would like to suggest some methods to improve the current debt position if the situation is, in fact, worsening due to external borrowing.