01/02/25, Interest burden on Revenue uncomfortable but Financial Year 26 could see relief

 It has been a long-standing grouse that a large part of the central government's revenue goes towards unproductive interest payments on its market borrowings. Past fiscal profligacies have continued to haunt the exchequer, and along with high interest rates have kept the interest outgo elevated for the central government.

 Interest payment burden on the government continues to remain significant

Cast your eyes on the above chart. Interest payments, on average, have accounted for a quarter of the total expenditure in the past decade. This burden increased steadily to 24 percent in FY25 from 23 percent in FY20. Interest payments are budgeted to be 31 percent of revenue expenditure in FY25, sharply higher than 27 percent in FY20.

The pandemic years saw the interest burden surge despite a sharp fall in the cost of borrowing as bond yields had plummeted. Why? The key reason is that the government's total borrowing zoomed. It doubled in FY21, the year that saw the pandemic and since then bringing down gross borrowing has been tough. For FY25, the gross market borrowing is budgeted at Rs 15.51 trillion, and most analysts expect the figure to remain unchanged even though the fiscal deficit could narrow.

That is because the government finances a lion's share of its deficit through market borrowings and the rest through its various savings schemes. It relies almost entirely on the bond market to bridge the fiscal gap. While bond yields are likely to remain benign and even trend down during the next fiscal year, the sheer size of the government borrowing could keep interest payments elevated. Also, past borrowings have been at a higher cost which renders the total interest outgo high. Any relief from the lower cost of borrowing during FY26 could be marginal and mostly in the future fiscal years rather than immediate. Note that the government borrows through long-term bonds.

Can the unproductive interest payment be brought down to a reasonable share, say below 20 percent? The only way to achieve this is to progressively bring down the market borrowing and that would mean the government would need to fortify other sources of financing. Specifically, it would need to boost its small savings schemes. And it could, of course, control its spending by making it more efficient.

source: Network18