Interest costs account for a fifth of Centre’s total expenditure

For the third year in a row, interest payments continue to be the single largest component of Centre’s total expenditure as record government borrowings to finance fiscal deficit has led to a massive jump in this expenditure. 

From ₹5.29-lakh crore in FY18, the Centre’s interest expenditure went up by 52 per cent to ₹8.05-lakh crore as of FY22. As per the revised estimates for FY23, interest expenditure is likely to go up further to ₹9.41-lakh crore. For FY24, the Centre has budgeted a record interest payout of ₹10.79-lakh crore. The interest expenditure grew at a CAGR of 12.63 per cent between FY18 and FY24. 

Covid-led disruption

Interest payments were not the single largest source of expenditure for the Centre till the Covid-19 pandemic hit in FY21. In FY19, expenditure towards ‘State’s share of taxes & duties’ accounted for 24 per cent of the total expenditure, while interest payments accounted for 18 per cent. 

With the pandemic-led fiscal disruption forcing the government to borrow more, the proportion of interest expenditure also went up proportionately. In FY22, interest payments account for 20 per cent of Centre’s total expenditure while the state’s share of taxes & duties reduced to 16 per cent. Defence and subsidy expenditures have also come down from 9 per cent each to 8 per cent respectively. 

“As interest payments rise there is less available for other purposes and this is why we need to control the deficit and overall debt,” said Madan Sabnavis, Chief Economist, Bank of Baroda. 

Higher interest expenditure gives little room for the government to increase their allocation for social sector spendings or capital expenditure. 

Indranil Pan, Chief Economist at YES Bank, feels the increasing interest expenditure may not be a constraining factor for the Centre on capex decision. He, however, added, “bulging interest payments is constraining the pace at which the government could have otherwise brought down its fiscal deficit.”

The Centre has increased the capex outlay for FY24  by 33 per cent to ₹10-lakh crore

Financing sources

Market borrowings through G-Secs & Treasury Bills accounts for 68 per cent of the total sources of financing the fiscal deficit. From ₹4.55-lakh crore of actual market borrowings in FY18, the government has projected it to grow to ₹12.31-lakh crore in FY24. Securities against Small Savings is the second largest source of deficit financing accounting for 26 per cent. The Centre has limited options to diversify its borrowing source to reduce its interest burden.  

YES Bank’s Pan said market borrowings are not the only source that adds to the interest burden but the small savings collections also carries higher interest burden for the government. “The only way for the Centre to reduce the interest burden is to reduce the public debt of the government.” 

External debt accounts for less than 2 per cent of the government’s total source of funding. Bank of Baroda’s Sabnavis said while it is possible to increase this source of fundraising, it is wise not to use it. “The moment we borrow from outside, then we become the object of scanning by rating agencies and multilateral agencies. Also, given that our rating is barely investment grade, the cost will be unfavourable.”

Pan also said external debt as a route should be used in black swan events like the Covid, etc. Importantly, external funding as a source should be more used by the commercial sector rather than the government.

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