In this fifth article of our analysis of the Union Budget 2024–25, we discuss India’s external accounts situation. That this is an important aspect of our economy is obvious from the situation in our neighbouring countries, Sri Lanka, Pakistan and Bangladesh, all of whose economies are entrapped in an external debt crisis, and have had to approach the IMF for a bailout loan.
The Economic Survey 2023–24 devotes a full chapter to our external sector. It says: “India’s external sector remained strong amidst ongoing geopolitical headwinds…. The shock absorbers of India’s external sector — forex reserves, sustainable external debt indicators, and market-determined exchange rate, are in place to cushion the global headwinds.”[1] With the government assuming that India’s external sector situation is very comfortable, the FM’s budget speech does not contain even a single line regarding the external accounts situation of our country!
The FM is behaving like an ostrich that has buried its head in the sand.
Let us briefly explain. As of end-March 2024, India’s external debt had gone up to $663.8 billion. That is huge — our country is one of the world’s most indebted countries. Our external debt has steadily gone up during the Modi years, from $446.2 billion in end-March 2014 to $663 billion in end-March 2024 (Chart 1).
Chart 1: India: External Debt, 2014 to 2024 (end-March) ($ billion)[4]
The Economic Survey 2023–24 claims that there is no reason to worry as our foreign exchange (forex) reserves are at a comfortable level, enough to cover 97.4% of our external debt as of March 2024.[2] India’s forex reserves in March 2024 were $646.4 billion.[3]
The establishment economists sitting in the Finance Ministry who have drafted the Economic Survey are hiding some important economic truths. Most people do not realise the difference between an external debt and an internal debt. It is important to understand that when a developing country like India incurs an external debt, this debt cannot be repaid in domestic currency (rupees in the case of India), as the currencies of the developing countries (including the rupee) have no international value. It can only be repaid in dollars, or any other international currency like the yen or euro. For that, India has to earn dollars. The most important way in which India can earn foreign exchange is by exporting goods and services. But India’s foreign exchange earnings from exports, as well as from other sources of forex earnings like remittances from workers who have gone abroad and send back money to their families, are less than our foreign exchange outflows (this includes imports, profit repatriation by foreign companies operating in India, etc.). This difference is called current account deficit (CAD).
In the financial year 2023–24, India’s total foreign exchange earnings from exports of goods and services, remittances, and other means were $942.9 billion. But the total foreign exchange outflows on account of imports, profit repatriation, etc. were $966.1 billion. India’s current account deficit in 2023–24 was therefore $23.2 billion (see Table 1).
There are only two ways in which a developing country like India can repay a CAD: i) by borrowing from abroad, that is, taking on foreign debt; and ii) by allowing foreign capital inflows into the country. Foreign capital inflows are of two types: (i) FDI (foreign direct investment) flows — these are investments in setting up new companies, or investments in existing companies; (ii) FII (foreign institutional investment) or FPI (Foreign Portfolio Investment) flows — investment in shares, bonds, debentures, options, etc. in the primary and secondary markets.
External ‘Debt’ Trap
An interest has to be paid on foreign debt, and capital investment inflows result in profit outflows. Both these lead to a rise in the CAD in subsequent years, implying that in the coming years, the country will need even more external debt / foreign capital inflows. It is a kind of debt trap!
As of March 2024, India’s external debt has increased to $663.8 billion. If India resorts to yet more borrowing to repay this massive external debt, that opens the Indian economy to imposition of conditionalities by India’s foreign creditors — foreign governments, their multinational corporations, and international financial institutions like the World Bank and IMF (which are under the control of the developed countries). And if India actively courts foreign capital inflows to finance our external debt, then the Indian Government will have to implement economic policies that encourage these capital inflows.
India’s foreign creditors thus have the Indian economy firmly in their clutches. The Indian Government has to kowtow to the desires of international finance, if it has to avoid external account bankruptcy.
But then what about our huge foreign exchange reserves? The Economic Survey expresses confidence that our forex reserves are “comfortable”. Mainstream economists writing in the media also exude confidence about our external accounts situation. Both are misrepresenting facts. They seek to convey the impression that our forex reserves are assets, when the reality is quite the opposite. As discussed above, our forex earnings are less than our forex outflows; India has a current account deficit. Then how can our foreign exchange earnings be in surplus? The fact is, our forex reserves are merely the total foreign monies held by the government and the central bank of India, including all the foreign capital inflows that have come into the country. This implies that if foreign investors start withdrawing their money from India, our foreign exchange reserves will fall.
This fact was admitted by the then RBI Governor at a Governors’ Meeting in Kyoto, Japan in January 2011:
“Our reserves comprise essentially borrowed resources, and we are therefore more vulnerable to sudden stops and reversals, as compared with countries with current account surpluses.”[5]
That was during the time of the UPA Government, when facts were not being manipulated. Today, it is difficult to find a mainstream economist or a bureaucrat making such a candid statement. Therefore, it is not surprising that the Economic Survey 2023–24 seeks to glorify rising foreign capital inflows as proof that the economy is doing well.
India’s Current Account Deficit, 2023–24
To understand how the Indian economy is entrapped in an external debt trap, we take a look at India’s current account situation for 2023–24. The RBI’s Balance of Payments data gives the current account data under four heads (Table 1):
- Our merchandise exports in FY24 were $441.5 billion, while merchandise imports were $683.5 billion. We therefore had a merchandise trade deficit of $242.1 billion in FY24.
- On the other hand, our service exports were considerably larger than our imports, the surplus being $162.8 billion, primarily because of export of “Telecommunications, computer, and information services” (net earnings $142.7 billion). So the net deficit in exports of goods and services was $79.3 billion.
- The head ‘Primary Income’ primarily reflects outflows of investment income, or profit repatriation by foreign companies. The net deficit under this head was $49.8 billion in FY24.
- The fourth head, ‘Secondary Income’ primarily consists of remittances by Indians employed overseas. The net flows amounted to $105.9 billion.
Table 1: India: Current Account Deficit ($ billion) [6]
| 2022–23 | 2023–24 | |||||
| Credit | Debit | Net | Credit | Debit | Net | |
| 1. Merchandise trade | 456.1 | 721.4 | –265.3 | 441.5 | 683.5 | –242.1 |
| 2. Services | 325.3 | 182.0 | 143.3 | 341.1 | 178.3 | 162.8 |
| 3. Primary Income | 27.8 | 73.8 | –45.9 | 41.5 | 91.2 | –49.8 |
| 4. Secondary income | 112.6 | 11.7 | 100.9 | 118.9 | 13.0 | 105.9 |
| Current Account Deficit (1+2+3+4) | 921.9 | 988.8 | –67.0 | 942.9 | 966.1 | –23.2 |
Table 1 shows that India’s CAD moderated considerably over last year, decreasing from a high of $67 billion in 2022–23 to $23.2 billion this year, primarily on account of a decrease in our trade deficit. But that is little reason to celebrate. As we can see from Chart 2, our CAD has been fluctuating during the past decade, but on the whole it has increased.
The only year in which India had a current account surplus was the pandemic year 2020–21, when the trade deficit considerably declined due to collapse of the economy and supply chain disruptions. If we leave out this year, then we can notice from Chart 3 that our CAD has doubled — from $21.2 billion during the triennium 2014–15 to 2016–17 to $43.1 billion during the triennium 2021–22 to 2023–24.
Chart 2: India Current Account Deficit, 2014–15 to 2023–24 ($ billion) [7]
Chart 3: Rise in India’s CAD During the Years 2014–15 to 2023–24 ($ billion)
The biggest saviour of our current account situation is the steady flow of remittances from Indian workers abroad, which constitute the overwhelming part of what are called ‘Transfers’, which is one of the sub-heads under the head ‘Secondary Income’. Transfers have indeed increased steadily, from $65.7 billion in 2014–15 to $75.2 billion in 2019–20 to $105.9 billion in 2023–24.[8] But this has not been enough to counter our merchandise trade deficit and outflows of investment income, resulting in an increasing deficit on current account.
Capital Account
The current account deficit is being met through capital inflows. As Table 2 shows, in FY24 net foreign direct investment (FDI) inflows totalled $9.8 billion, net foreign portfolio inflows (FPI) $44.1 billion, and net inflows of banking capital (including NRI deposits of $14.7 billion) $40.5 billion. These capital receipts were well in excess of the amount needed to finance the CAD. Consequently, the excess capital inflows accumulated as foreign exchange reserves, which rose by around $64 billion (see Table 3).
Table 2: India: Capital Account ($ billion) [9]
| 2022–23 | 2023–24 | |||||
| Credit | Debit | Net | Credit | Debit | Net | |
| 1. Foreign Investment | 385.1 | 362.2 | 22.8 | 540.7 | 486.8 | 53.9 |
| i. FDI | 75.2 | 47.2 | 28 | 74.6 | 64.8 | 9.8 |
| ii. Portfolio Investment | 309.9 | 315 | –5.2 | 466.1 | 422 | 44.1 |
| 2. Loans | 100.6 | 92.3 | 8.3 | 114.5 | 112.8 | 1.7 |
| 3. Banking Capital | 129.4 | 108.4 | 21 | 148.9 | 108.3 | 40.5 |
| 4. Rupee Debt Service | 0 | 0.1 | –0.1 | 0 | 0.1 | –0.1 |
| 5. Other Capital | 57.5 | 50.6 | 6.9 | 46.2 | 56 | –9.8 |
| Total Capital Account (1 to 5) | 672.6 | 613.6 | 58.9 | 850.3 | 764 | 86.3 |
Table 3: India: Balance of Payments ($ billion) [10]
| 2022–23 | 2023–24 | |||||
| Credit | Debit | Net | Credit | Debit | Net | |
| 1. Current Account | 921.9 | 988.8 | –67.0 | 942.9 | 966.1 | –23.2 |
| 2. Capital Account | 672.6 | 613.6 | 58.9 | 850.3 | 764 | 86.3 |
| 3. Errors and Omissions | 0.9 | 1.9 | –1 | 1.5 | 0.8 | 0.7 |
| Overall Balance of Payments (1+2+3) | 1595.3 | 1604.5 | –9.1 | 1794.7 | 1731 | 63.7 |
Within capital account, FDI inflows declined as compared to last year. But FPI inflows saw a huge jump, apart from doubling of net banking capital inflows (Table 2). These huge FPI inflows and the resulting rise in reserves are being portrayed as a ‘vote of confidence’ by foreign investors. The Economic Survey 2023–24 claims:
“Supported by optimism surrounding India’s growth story, progressive policy reform, economic stability, fiscal prudence and attractive investment avenues, India witnessed robust FPI inflows in FY24. Net FPI inflows stood at USD 44.1 billion during FY24 against net outflows in the preceding two years. This is the highest level of FPI inflow after FY15.” [11]
But the reality is the exact opposite. That we are dependent foreign capital inflows to repay our CAD should be a cause of concern, rather than celebration. Worse, the overwhelming part of the foreign capital inflows into the economy consists of inflows of portfolio capital and banking capital. They total $84.6 billion. They not only helped finance the $23 billion current account deficit but contributed an additional $62 billion, which helped in the rise of our forex reserves. In the euphoria about increasing foreign capital inflows, what is forgotten is that portfolio capital is footloose capital. Presently it is coming in, sending the sensex to record highs. But it can exit anytime it wishes, and that will not only send the stock market crashing, it will also lead to the exit of NRI depositors and other banking capital as well, plunging the economy into a crisis.[12]
Short-Term Debt vs. Foreign Exchange Reserves
Of course, not all the foreign investment can be taken out at short notice. Therefore, to get an idea of the actual safety buffer provided by the country’s foreign exchange reserves, they should be compared with what can be called the ‘short-notice’ liabilities of the country.
The Economic Survey 2023–24 claims that our external debt position is stable, as the “share of short-term debt (with original maturity of up to one year) in total external debt declined to 18.5 per cent at the end of March 2024 from 20.6 per cent at the end of March 2023.”[13] In absolute numbers, short-term debt (with original maturity of up to one year) was $122.5 billion.
But our total vulnerable debt liability is not just the short-term debt of up to one year, but the total short-term debt by ‘residual maturity’, i.e., it should include not only debt that was originally contracted as short-term debt, but also that portion of long-term debt which falls due within a year from the reference date. Apart from this, there are also two other vulnerabilities in our external debt, which need to be taken into consideration while considering the stability of our external debt position: (a) portfolio investments (i.e., FII investments in the share markets and in debt instruments), which can be withdrawn at any time; and (b) those NRI deposits which are fully repatriable at any time {Foreign Currency Non-Resident Bank [FCNR (B)] deposits and Non-Resident External Rupee Account (NRERA) deposits}. The total volume of these short-term liabilities are:
- Short-term debt by residual maturity:
- Short-term debt by residual maturity = $122.5 billion
- Long-term debt of residual maturity within one year = $162.4 billion[14]
- Total short-term debt of residual maturity of less than one year = $284.9 billion;
- Portfolio investments by FIIs as of end-March 2024 = $283.8 billion; [15]
- The outstanding sum in FCNR (B) deposits and NRERA deposits (excluding the NRI deposits included in short term debt of residual maturity of less than 1 year) = $37.3 billion.[16]
- Total Short-term Liabilities or the volatile part of our external debt (as of end-March 2024) = i + ii + iii = $606.1 billion = 91.3% of our external debt of $663.8 billion.
Our short-term or volatile liabilities as a percentage of our external debt is 91.3%, and not 18.5% as claimed by Economic Survey 2023–24.
But our actual volatile liabilities are even more than this. Cumulative FDI inflow into India between April 2000 and March 2024 stood at US$ 991 billion.[17] FDI is generally considered as the more stable part of external debt, since it is not merely financial investment, but is a long-term stake in Indian assets, associated with management control. However, a comprehensive study has found that, because of changed official definitions as well as official eagerness to project a larger figure of FDI, more than half of what is being classified as ‘FDI’ is of the nature of purely financial investment, such as by private equity firms, venture capital funds, and hedge funds.[18] While it can be argued that such investments are not as unstable as FII investments in the share market, they certainly cannot be considered to be stable investments. Even if we consider only 20% of our cumulative FDI inflows to be unstable investments and include them in our volatile liabilities, then India’s total vulnerable external liabilities exceed its foreign exchange reserves by a considerable margin.
Modi Government Bowing to Foreign Capital
So, the Economic Survey’s optimism regarding our external accounts is not grounded in facts; there is actually plenty to worry, the optimism is mere bravado.
To tackle India’s external debt crisis, the Modi Government is going down the same path as taken by other right-wing governments that have come to power in developing countries across the world, that are also entrapped in a similar external debt crisis. Rather than confront this crisis facing the Indian economy, it is implementing policies to appease multinational corporations and speculative capital so as to incentivise them to invest in India. This is the reason why it is seeking to reduce the fiscal deficit by cutting welfare expenditures on the poor — it is an important conditionality imposed by the WB–IMF on indebted developing countries. This was an important reason behind the Modi government’s refusal to increase its spending and give adequate relief to the people even at the peak of the pandemic crisis. Under pressure from foreign investors, the Modi Government is seeking to implement policies to enable giant foreign agribusiness corporations to take control of Indian agriculture — this was the real motive behind its dictatorial efforts to implement the three farm laws in 2020 despite countrywide protests by farmers. Foreign capital wants to seize control of our financial institutions, and so the Modi Government is gradually privatising India’s public sector insurance companies and banks — this will endanger the safety of the huge amount of people’s savings deposited with these institutions, apart from adversely affecting national development.
We discuss these policies in subsequent articles analysing the Union Budget 2024–25 and Modi Government’s economic policies.
References
1. Economic Survey 2023–24, p. 103.
2. Ibid., p. 28.
3. Handbook of Statistics on Indian Economy 2023–24, Table 150, RBI, https://rbidocs.rbi.org.in.
4. Data from: Ibid., Table 151.
5. “India Vulnerable to Sudden Outflow of Forex: RBI”, 31 January 2011, http://www.thehindu.com.
6. Developments in India’s Balance of Payments during the Fourth Quarter (January–March) of 2023–24, 24 June 2024, https://rbidocs.rbi.org.in.
7. Handbook of Statistics on Indian Economy, various years, RBI, https://rbidocs.rbi.org.in.
8. Ibid.
9. Handbook of Statistics on Indian Economy, 2023–24, Table 130, RBI, September 2024, https://rbidocs.rbi.org.in.
10. Ibid.
11. Economic Survey, 2023–24, p. 137.
12. For more on how foreign capital outflows can push the economies of the developing countries into external account bankruptcy, see our book: Neeraj Jain, Globalisation or Recolonisation?, Lokayat publication, Pune, available online at lokayat.org.in. This was also the reason why the Sri Lanka economy crashed in 2022. For more on the Sri Lanka crisis, see: R. Ramakumar, “Roots of Sri Lanka’s Economic Crisis”, Frontline 4 April 2022, https://frontline.thehindu.com.
13. Economic Survey 2023–24, p. 151.
14. India’s External Debt as at the End of March 2024, RBI Press Release, 25 June 2024, https://www.rbi.org.in.
15. India’s International Investment Position (IIP), March 2024, RBI Press Release, 25 June 2024, https://www.rbi.org.in.
16. Our estimate. We don’t have this data, the RBI has stopped releasing the residual maturity figures for NRI deposits. We only have figures for total outstanding FCNR (B) and NRERA deposits (in 2023–24) = $124.4 billion.[Source: Handbook of Statistics on Indian Economy, 2023–24, Table 145, op. cit.] We have the residual maturity figures of NRI deposits for June 2019; soon after that, the RBI stopped releasing this data. In June 2019, 70% NRI deposits were maturing within one year.[Source: India’s External Debt as at the End of June 2019, 30 September 2019, https://www.rbi.org.in.] Assuming that the ratio between NRI deposits maturing within one year and total NRI deposits has remained the same, total FCNR (B) deposits and NRERA deposits of residual maturity of one year in 2023–24 = 124.4 x 70/100 = 87.08. The remaining FCNR (B) deposits and NRERA deposits = 124.4 – 87.1 = 37.3.
17. Foreign Direct Investment (FDI), August 2024, https://www.ibef.org.
18. “The External Crisis”, Aspects of India’s Economy, No. 54, June 2013, http://www.rupe-india.org; K. S. Chalapati Rao, Biswajit Dhar, “India’s FDI Inflows: Trends and Concepts”, ISID Working Paper, 2011, http://mpra.ub.uni-muenchen.de.
Neeraj Jain is a social–political activist with an activist group called Lokayat in Pune, and is also the Associate Editor of ‘Janata Weekly’, a weekly print magazine and blog published from Mumbai. He is the author of several books, including ‘Globalisation or Recolonisation?’ and ‘Education Under Globalisation: Burial of the Constitutional Dream’.
