Do it yourself

 India’s external debt hit US$736.3bn by March 2025, a 10% jump from last year, with a significant portion (over 41%) of the debt maturing soon. As the US threatens 500% tariffs on countries buying Russian oil, including India, investors need to evaluate: Can India afford a confrontation with the US, China and other major trade partners, and could it withstand a covert economic embargo? Here’s my take, may be naïve and ill informed, but nonetheless relevant.

India’s External Debt

According to the Reserve Bank of India (RBI) latest release, India’s external debt stood at US$736.3bn at the end of March 2025, with a debt-to-GDP ratio of 19.1%. Key highlights of the data are:

Long-Term Debt: US$601.9bn, up US$60.6bn from last year, with commercial borrowings and non-resident deposits driving growth. About 77% (US$568bn) of this debt is owed by non-government entities. The non-government debt is almost equally divided between financial institutions (US$271.3bn) and non-financial corporations (US$261.7bn).

Short-Term Debt: US$134.5bn, representing 18.3% of total debt and 20.1% of foreign exchange reserves.

Components: About one half of external liabilities (US$251bn) is loans and debt securities, 22% currency and deposits and 18% trade credit. The rest 10% includes IMF SDRs and intercompany lending by MNCs.

Maturity: 41.2% of the external debt (about US$305bn), is due to mature within the next 12 months.

Debt Sustainability: Foreign exchange reserves cover 92.8% of total debt, down from 97.4% a year ago, signaling a slight decline in buffer capacity.

Refinancing challenge

With over 40% of long-term debt maturing soon, India faces a refinancing challenge, particularly if global financial conditions tighten or trade disruptions escalate. India’s reliance on Russian oil, which accounts for 35-40% of its crude imports (2.08 million barrels per day in June 2025), has put it in the crosshairs of a proposed US Senate bill. The “Sanctioning Russia Act of 2025,” backed by Senator Lindsey Graham and reportedly supported by President Trump, proposes a 500% tariff on countries importing Russian energy to pressure Moscow over Ukraine. India, alongside China, buys 70% of Russia’s oil exports, making it a prime target.

Economic Impact: A 500% tariff on Indian exports to the US, India’s largest export market, could affect US$66bn (87% of India’s US exports), as per Citi Research estimates. This could disrupt key sectors like pharmaceuticals, IT, and textiles, potentially triggering inflation and job losses.

Oil Dependency: India imports 88% of its crude oil, with Russia offering competitive discounts. Switching to costlier suppliers like the US or Middle East could raise import costs significantly, straining India’s trade balance.

Can India Afford a Confrontation?

India’s economic fundamentals offer some resilience but also expose vulnerabilities.

Forex Reserves: At US$703bn (as of recent data), India’s reserves cover 92.8% of external debt, providing a cushion to manage maturing obligations. However, refinancing US$270.9bn in long-term debt within a year could pressure reserves, especially if US tariffs disrupt export revenues.

Trade Dynamics: The US accounts for a US$45.6bn trade deficit with India. A trade war could prompt reciprocal tariffs, but India’s 12% trade-weighted average tariff (vs. the US’s 2.2%) limits its leverage. Negotiations for a trade deal to cut tariffs on US$23bn of US imports are underway, signaling India’s preference for diplomacy over confrontation; notwithstanding some recent comments of senior ministers that suggest otherwise.

Oil Alternatives: India has diversified its oil imports, with the US supplying 6.3% (439,000 bpd in June 2025) and West Asia 35-40%. While switching from Russian oil is feasible, it would increase costs, potentially impacting fuel prices and inflation.

Can India Sustain Virtual Economic Sanctions?

Virtual economic sanctions, such as the proposed 500% tariffs, or Chinese embargo on export of critical components, chemicals, human resources etc., would act as a severe trade barrier.India’s ability to sustain them depends on several factors.

Energy Security: India’s strategic reserves (9-10 days of imports) and diversified suppliers (US, Nigeria, Middle East) provide short-term flexibility. However, replacing Russia’s 40% share at higher costs could strain refiners and consumers.

Economic Resilience: The RBI’s Financial Stability Report (July 2025) highlights strong banking sector metrics, with declining non-performing assets and robust capital buffers. This suggests India’s financial system could absorb some shocks, but prolonged trade disruptions could erode confidence.

Need for caution

India’s debt remains manageable for now, but over 41% debt maturity in 12 months calls for vigilance. Investors in Indian bonds or banking stocks should monitor refinancing risks.

A US tariff war could hit export-driven sectors like IT and pharmaceuticals hardest. India’s diplomatic efforts to secure a trade deal or tariff waiver will be critical. A successful negotiation could stabilize markets, while failure could spark volatility.

Conclusion

India’s US$736.3bn external debt and looming maturities pose challenges, but its reserves and diversified oil sources provide a buffer. A full-blown confrontation with the US seems unlikely, given India’s diplomatic push and economic stakes. However, sustaining virtual sanctions would strain India’s trade balance and energy costs, making de-escalation the smarter play.

The 41% of external debt (US$305bn) maturing within 12 months is significant, requiring substantial refinancing or reserve drawdowns. India’s US$703bn forex reserves provide coverage, but a US tariff war could reduce export revenues, complicating debt servicing.

Sustained 500% tariffs would disrupt exports, weaken the rupee, and increase debt servicing costs. The RBI’s strong banking sector provides some stability, but prolonged sanctions could erode investor confidence and slow growth.

India’s neutral geopolitical stance and trade deal negotiations (aiming to cut tariffs on US$23bn of US imports) indicate a strategy to avoid sanctions. A waiver or partial exemption is possible, given India’s strategic importance to the US.

Read with US$703bn may be just enough

 There are lots of events happening in global markets which cannot be full explained through conventional wisdom or empirical evidence. In my view, lot of these events are unintended consequences of policy actions, geopolitics and trade conflicts.

For example, there is a massive rally in the global commodity prices, despite poor demand and growth outlook for next few years at least. The recovery to pre Covid level may not entirely explain the rise in commodity prices much beyond the 2019 levels. Popularization of electric mobility etc. can explain gains in some commodities, but not in steel, coal, crude etc.

The forecasts of a commodity super cycle sound mostly unconvincing, given (i) worsening demographics of the world; (b) restricted mobility; (c) seriously impeded purchasing power of people; (d) already stretched limits and diminishing marginal utility of fiscal and monetary stimulus; (e) technology evolution focusing on reversal of trends in labor migration; and (f) diminishing chances of a full-fledged physical war amongst large countries; etc.

Material changes technologies related to construction, manufacturing and transportation etc. also leading to material changes in the demand matrix for various commodities like steel, cement, copper, coal etc.

The outrageous rise in economic inequalities globally also mean that investment rate in poor countries will continue to decline for next many years, as the economic power gets more and more concentrated in the hands of few rich nations.

I therefore feel that the price trends in the global markets are deeply influenced by the factors other than economics. Even though the defeat of Donald Trump in US presidential elections has taken the trade conflicts away from headlines and front pages; the trade war that started few years ago is far from over. Besides, geopolitics is also playing a large role in global markets.

In past two years, China has been making conscious efforts to reduce its holdings of US Treasuries and building large reserves of physical industrial commodities. The global investors appear selling Chinese assets (leading to massive tech rout in China) and buying other emerging markets, in line with the global enterprises’ China+1 policy.

The unintended consequences are that world is facing shortages of rare earths, semi-conductors, and shipping containers and struggling with the rising prices of commodities. China which had been exporting deflation to the world for the past 10years has suddenly become exporter of inflation to the world.

The markets focusing more on US yields and USD cross rates, might be missing the point that Chinese aggression on commodities can derail the entire AI led Tech revolution for at least 4-5yrs, if it continues to choke supply of rare earths and semi-conductors. This derailment of global trade and therefore growth is a bigger worry than inflation at this point in time.

It is pertinent to note in this context that today China is hosting its annual gathering of National People’s Congress, its biggest political meeting, to approve the plan to propel Chinese economy to the top of the world, ahead of US. At the center of the new plan will be Beijing’s push to develop new technologies and cut the nation’s reliance on geopolitical rivals such as the U.S. for components like microchips. As per some experts, that should mean allocating more resources to science and technology, with spending on research and development targeted at around 3.5% of GDP over the period

Another case in point is the sharp rise in the price of sugar in global markets. This rise has occurred despite the higher than expected production in India and over 10.6MT carry over stock. But for MSP of Rs31/kg mandated by the government, the glut should have resulted in domestic prices falling to much below the cost of production. Also, but for export limitations and logistic constraints, Indian supplies could bring down the global prices to much lower levels. Visualizing this as signs of impending global food inflation cycle may not be appropriate.

The semi-conductor shortages are hurting manufacturing of white goods, electronic items and automobile, etc. This could have meaningful second round impact on other sectors of economy. Thankfully, the border conflicts and political rhetoric have not impacted the Indo-China trade materially. But India gaining advantage at the expense of China due to China+1 policy could have some repercussions in the short to medium term. The capacity building in India needs to take place now. A delay of even one year could potentially render much of this capacity redundant as global enterprises find alternatives or reconcile with China.

The short point is that US bond yields and USD exchange rate, etc. are least of the worries for our markets and economy, presently. Laying too much focus on these may only distract us from bigger threats and even bigger opportunities.