By Anshia Dutta
Interest payments form a significant amount of the central government’s expenditure. Nearly one-fifth to one-third of tax collection of the government of India is accounted for by interest payments. There is a rising concern with the ever-increasing interest payments since this can cause a setback in other developmental activities due to non-availability of funds.
India in a tight financial position
Over the past few years, India has been growing at a steady rate. However, hiccups like demonetisation and other factors adversely affected the country’s GDP in the past year. The rising government debt continues to loom as a threat to India’s growth rate in the future. The gross government general debt, a key indicator of the economy’s health and an important factor for the sustainability of government finance, stood at 67% of the country’s GDP as of 2016 which was higher than most of the other Asian economies. As of 2017, the centre’s total debt was a staggering ?4,700,000 crores and the states’ debt was also a massive ?1,800,000 crores, thus making the total government debt close to 65% of the country’s GDP. Perhaps, the only positive thing is that with the GDP having steadily increased over the past couple of years, which has resulted in the debt to GDP ratio coming down.
Urijit Patel, the governor of RBI had said, “Our general government deficit (that is, borrowing by the centre and states combined) is, according to IMF data, amongst the highest in the group of G-20 countries. In conjunction, the level of our general government debt as a ratio to GDP is cited by some as coming in the way of a credit rating upgrade.”
Concern over rising interest payments
A high debt means that a significant part of the government’s expenditure constitutes interest payments. In 2014-15, interest payments were 3.3% of India’s GDP. In 2015-16, India spent more than 1.4 times what it earned and its net interest payments (interest payments – interest receipts) pre-empted over 34% of the revenue receipts. However, the problem is that the rate of interest at which India borrows is much higher than the western countries. Therefore, some experts say that India must either increase its tax revenue or reduce its expenditure otherwise the mounting interest payments will land India in a soup in the long-run. However, practising the two measures is a daunting task in itself.
The tax evasion rate in India is very high and imposing a higher tax on the middle-class is politically infeasible. Raising the corporate tax is not an option since that will make India less attractive as an investment destination. The second and third-largest components of government expenditure after interest payments are defence expenditure and food, fuel, and fertiliser subsidies respectively. Expenditure incurred by the government on welfare programmes also comprises quite a large portion of its expenditure. However, cutting down on the same is definitely not going to happen and even if the government cuts down on these expenditures, it will face a backlash.
Expenditure on defence, social welfare programmes, and subsidies on food, fuel, and fertilisers swallow 30% of the budget. Interest payments eat up 25% of the budget and the remaining 45% is for everything else—for all the developmental activities which include infrastructure, education, and healthcare. Of the amount allocated for the latter, most is either wasted or corrupted. If the government is not able to sustain India’s steady growth rate, then it could risk falling further into the debt trap.
A research report by Stanford Chartered read, “Interest payment on outstanding government debt and increased market stabilization scheme bonds will put significant pressure on the fiscal deficit, in our view. Fiscal 2018 will be the first year since fiscal 2008 that the government’s interest payment burden will be larger than its fiscal deficit.”
The light at the end of the tunnel
However, not everybody has the same take on the interest payments upsurging. Experts say that emerging economies like India’s have higher interest payments since government debt is higher. It is a grave matter of concern only if the borrowings are not channelled towards increasing investments and productivity. Saugata Bhattacharya, the chief economist at Axis Bank said, “The end use of the debt is important, rather than the level of debt. If the borrowed funds aren’t being spent productivity, then there is a problem. India isn’t a bad situation, but the government needs to be careful in increasing borrowings going forward.”
Moody’s, the credit rating agency was optimistic about India’s current scenario. It said, “Over the medium term, goods and services tax will contribute to productivity gains and higher GDP growth by improving ease of doing business, unifying markets and will enhance India’s attractiveness as a foreign investment destination. GST will also support the higher government revenue generation through improved tax compliance and administration.”
Featured Image Credits: Visualhunt.com
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