Government looks to keep borrowing in check

The big pandemic stimulus and the contraction in the economy worsened the combined Centre and state debt-to-GDP ratio to 89.2% in FY21 from 75.1% in FY20. The International Monetary Fund (IMF) has forecast the ratio will improve to 83.5% of GDP in FY23 and gradually ease from FY26 onwards.

“Internally, deliberations have started on how to keep a check on the already high debt burden as interest outgo, otherwise, will keep rising at a steady rate,” a government official said.

“A final decision will be taken in due course after broader consultations.”

Staying with the already decided fiscal consolidation road map is seen as a crucial debt-control measure.

“The Centre aims to lower its fiscal deficit to 4.5% of GDP by FY26 from 6.4% in FY23. That in itself highlights the government’s commitment to fiscal discipline over the medium term,” he said.

The fiscal deficit for FY24 is budgeted to rise a modest 1.8% over the revised estimate for FY23, well short of the expected 10.5% rise in nominal GDP. If these estimates are met, the debt-to-GDP ratio should decline further in the next fiscal. The Centre’s interest cost is estimated to surge to Rs 10.8 lakh crore in FY24 (3.6% of estimated GDP) from Rs 6.1 lakh crore (3% of GDP) in the pre-Covid FY20.

The ratio of interest payments to the Centre’s tax revenue (net of states’ share) is estimated to rise to 46.3% in FY24 from 45.1% (revised estimate) this fiscal year.

In a December 2022 report, the IMF said, despite mitigating factors, India’s “debt sustainability risks have increased due to higher effective interest rates combined with high gross financing needs and slowing growth”.

Another person said once the government reduces the pace of its hefty rise in budgetary capital expenditure, it will be able to lower its borrowing sharply. “That (cut in capex growth) will happen when the private sector investment picks up meaningfully to boost economic growth,” he said.

In the aftermath of the pandemic, the central government has raised its reliance on budgetary capex to spur growth, betting big on its high multiplier effect to rescue the economy.

The allocation for capex was raised by 27% year-on-year in FY21, 39% in FY22 (including equity infusion into Air India Assets Holding) and 23% (revised estimate) in FY23.

The outlay for FY24, too, is up 37.4% from the revised estimate for this fiscal, way above the 7.5% rise in overall spending. Consequently, capex would constitute a record 22.2% of the total budgetary spending in FY24, against 16.2% this fiscal and just 12% in FY14.