Despite fears of an economic meltdown due to high debt, India's external debt to GDP ratio is the lowest amongst emerging markets after China. Indian economy is safe and sound and poised for high growth over the next few years.
Indian economy is not in the pink of health. QoQ GDP growth slumped to 5.8% in Q4 FY19 – the lowest in the recent past. Suddenly there is a lot of pessimism in the market. Some experts are doubting the GDP estimates and saying the true picture is even worse. Although the GDP growth rate is the most important economic indicator, it's folly to judge the overall health of the economy solely from it. Let's analyse another indicator that shows the long-term health of the economy – the external debt to GDP ratio. Unlike domestic (domestic currency) debt, external debt is critical because high levels of it can lead to insolvency and bankruptcy. External debt can only be paid from foreign earnings, and the central bank can't print more currency to service external debt.
Source: World Bank
Although we don't have the external debt data for 2018, it is obvious from the above chart that the debt situation has not worsened in recent years. If anything, the situation has slightly improved over the last few years. India's external debt to GDP ratio touched an all-time high of 34% in 1993. It came down to an all-time low of 16% in 2005, and it has steadily increased since then.
One thing to keep in mind while analysing external debt is the exchange rate of the debt currency vs domestic currency. USD is the external debt currency of every country. Indian GDP, when measured in USD, varies a lot because of the exchange rate of USD and INR.
For example, the Indian GDP at current prices grew by 9% in 2016, 3% in 2015, 10% in 2014, and 2% in 2013 when measured in USD. The GDP growth rate, when measured in INR, was more even in these years.
What about other developing countries? India's external debt stood at 19% of the GDP in 2017. How was the external debt situation in China in 2017? What about Russia and Mexico?
Source: World Bank
China's external debt to GDP ratio is the lowest amongst the major emerging economies. Although China's external debt is thrice that of India, its economy is more than 5 times. It shows the economic strength of China relative to other countries. External debt of the other 4 countries ranges from USD 455 BN for Mexico to USD 543 BN for Brazil. India's economy is the largest in this group, and hence its Debt/GDP ratio is the lowest.
So if there is a silver lining among all this gloom surrounding India, it is that the country is not going to be insolvent or bankrupt anytime now :).
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