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Q63 (IAS/2019) Economy › External Sector & Trade › External debt dynamics Official Key

Consider the following statements : 1. Most of India's external debt is owed by governmental entities. 2. All of India's external debt is denominated in US dollars. Which of the statements given above is/are correct?

Result
Your answer: —  ·  Correct: D
Explanation

The correct answer is option D - Neither statement 1 nor 2 is correct.

**Statement 1 is incorrect** because non-government debt is generally much higher than the government debt[2]. The documents clearly show that in 2022, out of India's total external debt of $610.5 billion, sovereign debt was only $124.5 billion (3.9% of GDP) while non-sovereign debt was $486 billion (15.3% of GDP)[3]. This means most of India's external debt is actually owed by non-governmental entities like corporates, not by the government.

**Statement 2 is incorrect** because India's external debt is denominated in multiple currencies, not just US dollars. India's external debt includes US Dollar denominated (55.5%), Indian Rupee denominated (30%), and then some is SDR, Yen, Euro[3]. While US dollars constitute the largest share, it accounts for only about 55-56% of the total, with significant portions in Indian Rupee and other currencies.

Therefore, both statements are incorrect, making option D the right answer.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
  2. [2] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
  3. [3] Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. Consider the following statements : 1. Most of India's external debt is owed by governmental entities. 2. All of India's external debt is…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a foundational static economy question derived directly from standard textbooks and the Economic Survey. It tests basic structural knowledge of India's Balance of Payments. Missing this indicates a failure to read the 'composition' tables in your primary source.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
What percentage or share of India's external debt is owed by governmental entities (central and state governments and public sector) as of the latest available data?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
Presence: 5/5
“2022, external debt of India was $610.5 Billion (19.2% of GDP). $610.5 billion = 19.2% of GDP "Sovereign Debt" | "Non-Sovereign Debt" • $124.5 billion (3.9% of GDP) | $486 billion (15.3% of GDP) • Sovereign Debt is also called Govt. of India | It includes • (external) Debt • (State Govt. external debt is in the name of |  Commercial Borrowing • GoI only) |  External Commercial Borrowing ECB • plus FII investments in Indian • It includes | corporate bonds FPI/FII investments in G-securities Loans under Bilateral Assistance |  NRI Deposits Loans under Multilateral Assistance • India's external debt can also be classified as 'short-term' (21.6%) and long-term debt.• Commercial borrowings remained the largest component of external debt followed by non-resident deposits.• Currency wise, India's external debt includes: • o US Dollar denominated (55.5%)• o Indian Rupee denominated (30%)• o And then some is SDR, Yen, Euro.”
Why this source?
  • Gives a numeric total external debt ($610.5 billion) and a clear sovereign (government) vs non‑sovereign split ($124.5B sovereign; $486B non‑sovereign).
  • Enables direct calculation of government share ≈ 124.5 / 610.5 ≈ 20.4% of total external debt.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
Presence: 4/5
“• In 2019-20, ECBs remained the largest component of India's external debt, with a share of 38 per cent, followed by NRI deposits (23.2%). • In 2020-21, US dollar-denominated debt continued to be the largest component of India's external debt with a share of 53.9 per cent at the end of June 2020, followed by the Indian Rupee (31.6%), Japanese Yen (5.7%), SDR (4.5%) and Euro (3.5%). • Non-government debt is generally much higher than the government debt.”
Why this source?
  • Explicitly notes that non‑government debt is generally much higher than government debt, corroborating that the government share is a minority portion.
  • Provides contextual support that the bulk of external debt is non‑sovereign, consistent with the numeric split in index 2.
Statement 2
What percentage or share of India's external debt is denominated in US dollars as of the latest available data?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
Presence: 5/5
“2022, external debt of India was $610.5 Billion (19.2% of GDP). $610.5 billion = 19.2% of GDP "Sovereign Debt" | "Non-Sovereign Debt" • $124.5 billion (3.9% of GDP) | $486 billion (15.3% of GDP) • Sovereign Debt is also called Govt. of India | It includes • (external) Debt • (State Govt. external debt is in the name of |  Commercial Borrowing • GoI only) |  External Commercial Borrowing ECB • plus FII investments in Indian • It includes | corporate bonds FPI/FII investments in G-securities Loans under Bilateral Assistance |  NRI Deposits Loans under Multilateral Assistance • India's external debt can also be classified as 'short-term' (21.6%) and long-term debt.• Commercial borrowings remained the largest component of external debt followed by non-resident deposits.• Currency wise, India's external debt includes: • o US Dollar denominated (55.5%)• o Indian Rupee denominated (30%)• o And then some is SDR, Yen, Euro.”
Why this source?
  • Gives a currency-wise breakdown and explicitly lists US dollar–denominated share as 55.5%.
  • Context includes the 2022 total external debt figure, making this the most recent percentage in the set.
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
Presence: 4/5
“• In 2019-20, ECBs remained the largest component of India's external debt, with a share of 38 per cent, followed by NRI deposits (23.2%). • In 2020-21, US dollar-denominated debt continued to be the largest component of India's external debt with a share of 53.9 per cent at the end of June 2020, followed by the Indian Rupee (31.6%), Japanese Yen (5.7%), SDR (4.5%) and Euro (3.5%). • Non-government debt is generally much higher than the government debt.”
Why this source?
  • Provides an explicit US dollar share (53.9%) for end-June 2020, corroborating that USD is the largest currency share.
  • Gives a close historical reference point showing stability of USD dominance in external debt composition.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 164
Presence: 3/5
“The Rupee denominated debt is basically FPIs/FIIs purchasing Indian Govt. bonds and Indian companies' bonds in Indian market and Masala bonds raised by Indian companies in abroad market and some NRI deposits in Indian rupees. • Multilateral assistance includes loans from multilateral institutions such as International Bank for Reconstruction and Development (IBRD), International Development Agency (IDA) (IBRD and IDA are together called World Bank), International Fund for Agriculture Development (IFAD), Asian Development Bank (ADB), Organization of Petroleum Exporting Countries (OPEC) etc. Loan from IMF has been included under other govt. debt.• Bilateral assistance includes loans from Japan, Germany, US, France, Russia• Major portion of external debt is denominated in US dollars.”
Why this source?
  • States that a major portion of external debt is denominated in US dollars, supporting the prominence indicated by the numeric shares.
  • Reinforces the qualitative conclusion that USD is the dominant currency component.
Pattern takeaway: UPSC Economy questions often focus on 'Trends and Composition' rather than absolute numbers. They test if you understand the *character* of the economy (e.g., private sector driven debt vs state driven). Extreme statements like 'All' in economic contexts are almost invariably false.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from Vivek Singh (Ch. 4) or Nitin Singhania (Ch. 16). No current affairs magic required.
  2. [THE CONCEPTUAL TRIGGER]: The 'External Sector' chapter, specifically the sub-topic 'India's External Debt Stock' and its breakdown.
  3. [THE HORIZONTAL EXPANSION]: Memorize the 'Order of Magnitude': 1) Borrower: Non-Sovereign (~80%) > Sovereign (~20%). 2) Currency: USD (~55%) > INR (~30%) > SDR > Yen. 3) Component: ECBs > NRI Deposits > Short-term credit. 4) Maturity: Long-term (~80%) > Short-term.
  4. [THE STRATEGIC METACOGNITION]: When studying macro-indicators (Debt, Forex, GDP), never stop at the total number. Always ask: 'What is the largest component?' and 'Who holds the most?'. UPSC tests the *structure*, not the *digit*.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Sovereign vs Non‑sovereign External Debt
💡 The insight

Distinguishes government (sovereign) borrowings from private/non‑sovereign borrowings, which is central to measuring government share of external debt.

High‑yield for UPSC: many questions ask about composition of external debt and policy implications; understanding this classification helps interpret debt statistics, fiscal risk, and external vulnerability. It links to government finance, balance of payments, and debt sustainability topics, and enables questions requiring calculation of shares.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "What percentage or share of India's external debt is owed by governmental entiti..."
📌 Adjacent topic to master
S1
👉 Calculating government share of total external debt
💡 The insight

Converting sovereign debt and total external debt figures into a percentage gives the government share required by the question.

Practically useful: UPSC often tests ability to compute shares and interpret ratios (e.g., share of public vs private debt). Mastery aids quick numerical reasoning in mains and prelims and connects to topics like debt‑to‑GDP and composition analysis.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "What percentage or share of India's external debt is owed by governmental entiti..."
📌 Adjacent topic to master
S1
👉 Private sector dominance in external borrowings
💡 The insight

Recognises that non‑government entities typically hold the larger portion of external debt, affecting the assessment of sovereign exposure.

Important for framing policy answers: candidates can discuss why private borrowings matter for external vulnerability, exchange rate risk, and contingent liabilities. This concept links public finance to external sector analysis and risk assessment questions.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "What percentage or share of India's external debt is owed by governmental entiti..."
📌 Adjacent topic to master
S2
👉 Currency composition of external debt
💡 The insight

External debt is reported by currency and the US dollar often constitutes the largest single share.

High-yield for UPSC questions on balance of payments and external sector risks; it links to exchange rate vulnerability, debt-service risk and policy choices on foreign currency borrowing. Helps answer questions on external-sector composition, contagion risk, and macroeconomic stability.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
🔗 Anchor: "What percentage or share of India's external debt is denominated in US dollars a..."
📌 Adjacent topic to master
S2
👉 Major instrument-wise components of external debt
💡 The insight

External debt comprises distinct instruments such as External Commercial Borrowings (ECBs), NRI deposits and commercial borrowings which determine exposure.

Important for analyzing who bears external liabilities and their risk profiles; connects to fiscal policy, private versus sovereign borrowing, and crisis transmission pathways. Enables questions on composition-based policy prescriptions and vulnerability assessment.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > 16.18 Indian Economy > p. 486
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "What percentage or share of India's external debt is denominated in US dollars a..."
📌 Adjacent topic to master
S2
👉 Short-term vs long-term classification of external debt
💡 The insight

External debt is classified by maturity (short-term vs long-term) and that split affects rollover and liquidity risk.

Crucial for evaluating immediate external vulnerability and foreign exchange reserve adequacy; links to questions on current account, capital flows stability and crisis management. Useful for constructing arguments about policy resilience and short-run financing gaps.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 4: Government Budgeting > Govt. of India (Central Govt.) Total Debt/Liabilities = 1 + 2 + 3 + 4 > p. 163
🔗 Anchor: "What percentage or share of India's external debt is denominated in US dollars a..."
🌑 The Hidden Trap

The 'Debt Service Ratio' (repayment vs current receipts) is low (~5.3%), indicating comfort. However, the 'Short-term debt by Residual Maturity' is significantly higher (~44%) than by 'Original Maturity' (~20%), representing a hidden rollover risk.

⚡ Elimination Cheat Code

Apply the 'Global Basket Logic' to Statement 2. India borrows from the World Bank (mix of currencies), Japan (Yen), and issues Masala Bonds (Rupee). The word 'All' makes Statement 2 technically impossible. For Statement 1, recall that India is a mixed economy with massive private corporate borrowing (ECBs); the government is fiscally conservative externally.

🔗 Mains Connection

Mains GS-3 (Economic Stability): High private external debt (ECBs) creates 'Systemic Risk'. If the Rupee depreciates sharply, Indian companies with unhedged dollar loans face ballooning repayment costs, leading to corporate bankruptcies and rising NPAs in domestic banks.

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