Page 484 - ES 2020-21_Volume-1-2 [28-01-21]

External Sector 111

channel flagged in the literature through which the external debt impacts growth adversely is
the so-called Debt Overhang: in the likelihood of future debt being larger than the countries
repayment ability, then, expected debt service will be increasingly pre-empting the country’s
output levels, leading to returns on investments becoming poor and thereby discouraging the
new domestic and foreign investments and also eroding the quality of investments.

The India’s external debt to GDP ratio has been well below the optimal zone over the years
as it came down from 38.7 per cent as at end-March 1992 to as low as 17.1 per cent as at
end-March 2006 (Figure B4.1). It remained range-bound around 23 per cent during early
4
2010s. It is estimated at 20.6 per cent as at end-March 2020. Barring China, leading emerging
market economies have higher ratio than India’s.

India’s external debt to exports ratio dropped secularly downwards since the crisis year 1992,
though it has climbed up in the recent years and is now hovering in the close vicinity of
the optimal zone (Figure B4.2). It needs to be remembered that the optimal zone indicates
growth maximising compatible with the long-run framework of steady state.

Figure B4.1: Ratio of External Debt to GDP in India and Select Developing Countries*:
Optimal Range vs. Actual
@
45
40 Optimal Zone
35 Mexico Brazil
30 India
Per cent 25 Indonesia
20
15 China
10
5
0
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

* For countries, other than India, it is external debt to Gross National Income (GNI) ratio
@ From Pattillo, et al, 2002 and 2011
Source: Annual Status Report on India’s External Debt and International Debt Statistics: Various Issues

Figure B4.2:Ratio of External Debt to Exports in India and Select Developing Countries:
Optimal Range vs. Actual
@
495
445 India
395
345
Per cent 295 Brazil
245
195 Indonesia
145
95 Optimal Zone Mexico
China
45
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19

@ From Pattillo, et al, 2002 and 2011
Source: Annual Status Report on India’s External Debt and International Debt Statistics: Various Issues

4 The optimal zone considered in this context is from Pattillo, et al, 2002 and 2011as it relates to developing countries