Experts feel that India’s debt situation is a cause of concern

Raising concern over increasing Central government debt, the Comptroller and Auditor General (CAG) of India has stated that several indicators have gauged the sustainability of debt turning unfavourable since 2015-16. The CAG in a report tabled in parliament recently pointed out that some of the indicators like debt/GDP ratio, interest repayment to revenue receipts and interest rate spread became unfavourable during the five-year period from 2015-16 to 2019-20.

The Central government debt-to-GDP ratio in 2019-20 was 52.30%, which was 50.5% in 2015-16.

The government was using 34% of the revenue earned in 2019-20 to pay interest on the debt. In 2015-16, this was 32%. The report also pointed out that although the average interest cost declined from 6.91% in FY16 to 6.61% in FY20, the actual interest paid on debt consistently increased from Rs 4.57 lakh crore in FY16 to Rs 6.55 lakh crore in FY20 due to expanding overall debt.

The CAG pointed out another area of concern, which is the interest spread - the difference between nominal GDP growth rate and average interest cost – which turned negative in 2019-20. The CAG said the government must have in place a requisite plan to achieve the target set by the FRBM act to cap the Central government debt-to-GDP ratio of 40%.

The data released by the department of economic affairs in the Finance Ministry showed interest paid on debt by the central government has increased to `8.05 lakh crore in FY22 from Rs 6.80 lakh crore in FY21. The government spent almost 37% of its total revenue in FY22 on interest payments. The overall central government debt, as per provisional estimates, was Rs 128 lakh crore, 54% of the GDP in FY22.

“One of the major fallouts of high debt is interest payments, which could have been otherwise used for more productive purposes. It is estimated that the Indian government’s interest payment is approx 3.1% of GDP against 2.5% in 2014-15,” says Debopam Chaudhari, chief economist and head of research, TruBoard Partners.