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Informist, Tuesday, Aug 27, 2024

 

--Govt sources:May look to cut debt by 0.5-1.0% of GDP/yr to meet aim 
--Govt sources: Need to decide debt level target before FY27 Budget 
--Govt sources:May set a debt level target to be achieved in 10 years 
--Govt sources:Lowering debt-to-GDP aligned to cutting interest outgo 
--Govt sources:Focussing on lowering debt sustainably, systematically 
--CONTEXT: Govt FY25 interest outgo seen 11.63 trln rupees, up 9.3% 
--Govt sources: Current level of interest burden not comfortable 
--Govt sources: Cutting interest outgo at centre of new fisc strategy

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI – The government will focus its fiscal consolidation strategy on bringing down its interest burden in coming years, even though the current level of interest expenses does not pose an immediate threat to debt sustainability, senior finance ministry officials said.

 

Though debt sustainability is not a concern, the task at hand is to further widen the gap between the rate of growth in nominal GDP and the rate of increase in interest burden, one of the officials said.

 

The interest burden is not a "concern", it is not entirely at "comfortable" levels as well, the official told Informist. This is reflected in the fact that the government's interest expenditure is higher than its capital expenditure for the current financial year.

 

The government’s emphasis on lowering interest payments seems aligned with the assessment of rating agencies. In an interview with Informist last week, Christian de Guzman, senior vice president at Moody's Ratings, said that a rating upgrade for India hinges on its ability to cut back on its debt burden and more importantly, its interest payments as a percentage of revenues.

 

The Budget for 2024-25 (Apr-Mar) has pegged the government's interest expense for the current fiscal at 11.63 trln rupees compared with the capital expenditure of 11.11 trln rupees.

 

Interest payments are projected to grow 9.3%, while the nominal GDP is expected to grow 10.5% in 2024-25.

 

The Indian government will spend 19 paise of every rupee it earns in 2024-25 to pay interest on past borrowings, according to the Union Budget for 2024-25. To give a comparison, the government will spend 4 paise of every rupee earned on pensions and 6 paise on subsidies.

 

Considering the interest burden is spread over many years based on the tenure of borrowings, the government's focus right now is to ensure that debt goes down systematically and sustainably, another official said. "We have repayments for loans taken years back... in high-interest rate cycles and low-interest rate cycles. If we do not make efforts at lowering debt, interest outgo will complicate government expenses in the future," the official said. 

 

"How interest rates play out in the future is beyond the control of the government, but what the government can control is cutting the debt stock to such an extent that the interest payout does not become a burden for future governments as well," the official added. The official also highlighted that even the current government borrowing is happening in a high interest rate regime.

 

In the full Budget, the gross market borrowing by the government was revised lower to 14.01 trln rupees from 14.13 trln rupees in the Interim Budget. This is the first decline in gross borrowing after three years of record-high supply culminating in 15.43 trln rupees of bonds issued in 2023-24. 

 

The policy shift towards lowering the Centre's debt-to-GDP ratio, which the government announced in the Budget, is in fact aligned with the intention of cutting interest expenses, the first official quoted above said. Earlier, the government's stance was to lower the fiscal deficit to less than 4.5% of GDP by the end of 2025-26. 

 

In the Budget for 2024-25, Finance Minister Nirmala Sitharaman said that from 2026–27 onwards, the government will endeavour to "keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP."

 

This indicated a departure from targeting a particular fiscal deficit level for each financial year. At the 4.9% fiscal deficit target for the current year, the central government's debt is 56.8% of GDP, according to Budget documents.

 

The government will likely set a particular level of central government debt that it wants to achieve in 10 years, one of the officials said. To reach that level, the government will likely lower debt by 0.5-1.0?ch year. The fiscal deficit will no longer be the reference point for managing the government's finances, the official said. 

 

While broadly the approach to debt reduction has been finalised, the government is yet to take a final call on the level of debt that it would like to target at the end of 10 years. "We need to finalise this before presenting the Budget for 2026-27, so we have time before we take a final call," the official said.   End

 

Edited by Saji George Titus

 

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