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Informist, Sunday, Feb. 2, 2025

 

--Econ secy: Will talk to states to cut general govt debt-GDP ratio to 75%

--Econ secy: Long-run aim is to cut general govt debt-to-GDP ratio to 70%

--CONTEXT: Econ Affairs Secy Ajay Seth's comments in interview with Informist

--Econ secy: Expect 16th Finance Commission to ask states to cut debt-to-GSDP

--Econ secy: Will ask states with high debt to focus more on capex

--Econ secy: Rtg agencies see high interest payment-to-revenue as constraint

--Econ secy: Interest payment-to-revenue ratio "guiding tool" for India now

--Econ secy: Raised FY26 WMA estimate for efficient cash management

--Econ secy: Aim to maintain lean cash position, utilise WMA if needed

--Econ secy: Having high cash position not effective way to manage finances

--Econ secy: May do gilt buybacks in next 7-8 wks depending on cash position

--Econ secy: To smoothen coming redemption hump via buybacks when possible

--Econ secy: Nudging states towards good cash management

 

 

By Krity Ambey and Sagar Sen

 

NEW DELHI – The Centre is set to nudge states to follow its lead in targeting a reduction in debt levels, with the medium-term objective for the general government debt-to-GDP ratio seen at 75%, before it is cut further to 70%, Economic Affairs Secretary Ajay Seth said Sunday.

 

"First, the goal is to bring it (general government debt-to-GDP ratio) down to about 75% and then aim for getting it to 70%," Seth told Informist in a post-Budget interview. The secretary also said that the central government will ask state governments, especially those with high debt levels, to improve the quality of their spending to focus more on investments and capacity building.

 

The 2025-26 (Apr-Mar) Union Budget presented on Saturday set out a glide path for the Centre to reduce its debt-to-GDP ratio from 57.1% in FY25 to 50.0% in a band of 49-51% by FY31. However, public debt is globally seen as the sum of the federal and regional governments. According to the International Monetary Fund, India's total government debt was 83.0% of GDP in 2023, and is seen declining to 78.4% in 2029. For ratings agencies, this number is far too high. According to Fitch Ratings, the median debt-to-GDP ratio of countries it rates BBB is 58.3%.

 

Global ratings agencies have also flagged to the government its high interest payment-to-revenue ratio, which they say is a hurdle to India getting an upgrade. "...when interest-to-revenue receipts, that ratio is high, then they say if there were to be a crisis in future then the government of India's ability to respond is rather constrained," Seth said. Seemingly responding to these agencies' concerns, Seth said the interest-to-revenue receipts ratio will be a "guiding tool" for the government going forward.

 

Despite a huge thrust on capital expenditure in recent years, the Centre's interest payments are set to make up 32.4% of its revenue receipts in FY26, up from 29.0% in FY19.

 

CASH CAUTION

Having reintroduced bond buybacks after a six-year gap in FY25, the government is poised for a lean cash management strategy next year. "Always being in a cash position is not the best way of managing fiscal, because one has borrowed it, one is paying interest on those borrowings," Seth said.

 

Therefore, the government has pegged a high estimate of INR 5 trillion for its cumulative recourse to Way & Means Advances in FY26, the government official said. "That (the high estimate) reflects our aim to have a lean cash balance. If it goes into Ways & Means advance, so be it. Go and come out, there's no point in holding cash balances."

 

The government's estimate for Ways & Means Advances has jumped nine-fold in FY26 from INR 550 billion in the revised estimate for the current fiscal year and INR 500 billion in the Budget estimate, according to the next fiscal year's Budget presented in Parliament on Saturday. Under the provision of Way & Means, the government can avail funds from the Reserve Bank of India to bridge the temporary gap between receipts and expenditure.

 

In the current fiscal year, when the government's cash position shot up due to low spending around the General Election, it bought back gilts worth INR 881.64 billion for efficient cash management. The government will be watchful of its evolving cash position in the next seven to eight weeks also, and would carry out buyback operations if it sees an opportunity, Seth said.

 

Such buyback operations help the government in smoothening its redemption pattern, Seth said. "In FY26 our net borrowings are a few thousand less than the current year, but gross borrowings are about 4-5% higher because there was a redemption hump," Seth added. "We have smoothened the hump, but not entirely. So the attempt is, moving forward, we keep on smoothening it through switching for sure, wherever the opportunity comes through the buyback."

 

The government's bond redemptions are set to rise sharply going ahead as the debt raised by it during the COVID-19 pandemic starts turning up for repayment. A redemption hump of INR 7.02 trillion is awaiting in FY27.

 

"There is also a pressure in the market - liquidity issue is there. So we are trying to get into a leaner cash position," Seth said. The domestic liquidity conditions have deteriorated rapidly over the last couple of months following huge dollar sales by the RBI to defend the rupee's exchange rate. The central bank sold a record $51.11 billion in November to stem the rupee's fall.

 

"The need for the government to hold high cash balances has gone down," Seth said. "In fact, the expectation is that, like the Government of India has significantly improved its cash management practices, states will also do the same," Seth said. Notably, the government has also cut the FY25 estimate for net 14-day Treasury bills, where states usually park their idle funds, to (-)INR 305.46 billion.  End

 

US$1 = INR 86.61

 

Edited by Ashish Shirke

 

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