Problem Statement: Traditionally the analysis of sovereign debt in developing economies has focused on external debt. However, in recent years, several developing countries have adopted aggressive policies to remove the external sovereign debt, replacing it by the country issued debt. This study is an attempt to examine the level of indebtedness of the Government of India with special reference to the United States. Further, it seeks to determine the effects of the sovereign debt crisis emanating from the United States on a developing economy like India. The study also examines the possible compromise between the internal and external borrowing and whether a switch to domestic borrowing can play a positive role in reducing the risks of sovereign finance. Approach: To achieve the same the research methodology adopted is primarily doctrinal wherein most of information is collected from secondary sources and authoritative reports from the World Bank, International Monetary Fund, Reserve Bank of India annual report and other scholarly writings by leading policy makers and economists. Results: The research documents that since the domestic economy in India is not isolated from the global economy, there will certainly be a few jerks felt in India. Both imports and exports will be affected. Exports from India to the United States, especially IT services, will issue an impact. The study also shows that since the beginning of the financial crisis in industrial countries sovereign debt has increased dramatically and they are set to continue increasing for the foreseeable future. Furthermore our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking and currency crisis. Conclusion: The path pursued by the tax authorities in a number of industrial countries is unsustainable. The Privatization program is one of the most attractive answers to the question of reducing the sovereign debt. This paper suggests that the traditional dichotomy between external and domestic debt does not make much sense in a world of open capital accounts and that, although the recent switch to domestic borrowing has important positive implications for debt management, policy makers should not be too complacent.