It’s a crucial fact that almost every country of the world has taken external debt. India is also one of them. India's external debt was $510.4 billion at Sept-end which was at all time high of 529 billion dollar in March 2018.
In such a scenario when India has debt of around 20.8% of its GDP, and the country is paying 18% of its revenue in interest payment. A question arises in the mind of common peoples that why does India not repay this debt by printing more Indian currency despite having a currency printing machine in the country.
Let’s discuss about its possibility and consequences arising from it.
How much Currency notes can be Printed by the RBI?
Printing of currency notes in India is done on the basis of Minimum Reserve System (MRS). This system is applicable in India since 1957.
According to this system, the Reserve Bank of India has to maintain assets of at least Rs.200 crore all the time. Out of this Rs.200 cr; Rs.115 cr should in the form of Gold and rest Rs.85 cr. should be in the form of foreign currency.
After holding asset of Rs. 200 cr. the RBI can print any number of currency notes as per the requirement of the economy. Although; before printing the notes RBI has to take prior permission from the Central government.
External debt on India
At end-September 2018, India’s external debt was US$ 510.4 billion, which was 529 billion dollars in March, 2018.
The external debt to GDP ratio of India stood at 20.8% at end-September 2018, higher than its level of 20.5% at end-March 2018.
The largest component of external debt of India was commercial borrowings (37.1%), followed by NRI deposits (23.9%) and short-term trade credit (19.9%).
The largest component of India’s external debt was in US dollar i.e., 49.7% in September 2018, followed by the Indian rupee 36.1%, SDR 5.3%, yen 4.7% and Euro 3.2%.
Sources of Inflow of Dollars in India are;
1. Dollar inflows in India when a foreign company/individual investor invests in India.
2. Payment received for Indian export
3. External Remittances sent by Indian workers working abroad
4. Foreign students who come to study in India also bring dollars
5. Foreign tourists also bring dollars
6. External help India receives from international institutions and rich countries
7. Government borrowings from the international institutions and rich countries
Can the Indian government repay the foreign debt by printing new Currency?
The answer is no. Government of India cannot print the new rupees to pay the external debt because;
‘India has to pay the external debt in the same currency in which it is borrowed.’
The largest component of India’s external debt was in US dollar i.e., 49.7%. It means India need to repay maximum debt in US dollars which can’t be printed by the RBI.
So India has to pay debt in dollars, not in Indian rupees. If the RBI prints the new currency; it won’t be of any use because the lender country which may be USA or any other country will not accept the payment in Indian currency. Hence printing of new rupees will put extra burden on the exchequer without any profit.
If foreign countries and institutions are ready to accept repayment in the Indian currency only then printing of new currency notes can be used to repay the external debt. But Indian rupee is not global currency so foreign institutions and countries will not accept Indian rupees until there is a trade agreement between them.
How does Printing Excess Money Affect the Economy
If the RBI prints new currency then the supply of currency will increase in the country which will further increase the inflation in the country.
Suppose if the money supply increased to 50% then the price of general prices like bread, butter, clothing, house etc. will also increase proportionately 50%. So the printing of new currency will not have any positive impact on the Indian economy.
On the other hand public exchequer will have to bear the cost of printing of new notes.
Thus, it can be said that the RBI can print innumerable rupees but if this extra money increases the inflation and external debt of the country remains as it was then printing of countless rupees is not in the country's interest.