Interest Payment Burden to reduce in FY26
Overview
The fact that the central government’s market borrowings result in unproductive interest payments accounting for a significant portion of its revenue has long been a source of criticism. In addition to high interest rates, previous fiscal mismanagement has plagued the exchequer and kept the central government’s interest outflow high.
Interest Payment over the years
In the last ten years, interest payments have made up 25% of all expenses. From 23% in FY20 to 24% in FY25, this load grew gradually. In FY25, interest payments are projected to account for 31% of revenue expenditures, a significant increase from FY20’s 27%.
Despite a dramatic decline in borrowing costs due to the steep decline in bond yields, the interest burden increased during the pandemic years. The primary cause is the increase in the government’s overall borrowing. Reducing gross borrowing has been difficult since it doubled in FY21, the year of the pandemic. Even though the fiscal deficit may decrease, most analysts predict that the total market borrowing for FY25 would stay around Rs 15.51 trillion.
This is due to the fact that market borrowings account for the majority of the government’s deficit funding, with the remainder coming from its different savings plans. Its primary source of funding to close the fiscal shortfall is the bond market. The magnitude of the government’s borrowing may keep interest payments high even though bond yields are predicted to be stable and even decline over the course of the upcoming fiscal year. Additionally, previous borrowings were more expensive, which raises the overall interest expense. Any benefit from FY26’s lower borrowing costs may be slight and primarily available in subsequent fiscal years rather than right away. Keep in mind that long-term bonds are how the government borrows money.
Solutions to managing interest payments
For interest payments to be less than 20%, gradual reduction in market borrowing, which would require the government to strengthen its alternative funding sources would be necessary. The plan would specifically need to improve its small savings schedules. Of course, it may also reduce its expenditures by increasing its efficiency.
Last Financial Year Scenario
According to a senior government source, the federal government’s interest payout is anticipated to increase by 11–12% in the upcoming fiscal year compared to the current fiscal 2024. An estimated Rs 10.80 lakh crore, or roughly 24% of the financial year’s budgeted expenses, was paid out in interest in FY24. Interest payments totaling Rs 6.12 lakh crore made up 22.8% of all expenses in the pre-Covid FY20 period.
Reasons for higher interest payment
The official told ET that although interest payments are expected to increase by 11–12% in the upcoming fiscal year, they are still manageable. A rise in borrowing is indicated by higher interest payments. The official claimed that because COVID shock boosted expenditure pressure, the government’s total debt had swelled.
Additionally, the conflict between Russia and Ukraine and the subsequent surge in global commodity prices caused the Center’s subsidy bill to rise in FY23, avoiding a more severe fiscal correction. The Center estimates that its fiscal deficit will be 5.9% in FY24 and aims to reduce it to 4.5% in FY26. International organizations have called attention to India’s high debt load. The IMF predicted that by FY28, the total debt of India’s states and the central government will reach 100% of GDP in the worst-case scenario and fall to less than 70% in the best-case scenario.
Net Tax Revenue increased
The administration emphasized that the debt was primarily in domestic currency and allayed concerns about the sustainability of the loan. The Center’s net tax revenue is expected to increase by 63.5% over the previous two years, from Rs 14.26 lakh crore in FY20 to Rs 23.31 lakh crore in FY24. According to estimates, its expenses increased by 67.6% from Rs 26.86 lakh crore in FY20 to Rs 45.03 lakh crore in FY24.
Former National Statistical Commission chairman Pronab Sen stated that while the high interest outgo is a problem, it is not yet reason for undue alarm. More crucially, the government needs to drastically increase its Tax-to-GDP ratio. This will deal with the interest load problem. He added that it will also be beneficial if the government reduces its fiscal deficit to the desired 4.5% of GDP by FY26.
For the last ten years, the gross tax-to-GDP ratio has stayed between 9.8% and 11.4%. Global agencies’ worries over India’s debt sustainability, according to Sen, may have been overblown, especially considering that the nation’s external debt only accounts for a small percentage of its total obligations.
The image added is for representation purposes only
