Post-lockdown govt debt may be set back by 17 years!

Published: June 13, 2020 at 11:46 am

India’s “debt to GDP ratio” increased by 3.5% from March 2019 to March 2020. In this article,  we discuss concerns over how the lockdown could push govt debt higher and enumerate the status of govt borrowing pre-lockdown listed in the Ninth Edition of the Status Paper on Government Debt.

Debt to GDP ratio measures the percentage of govt debt in a countries GDP. According to the World Bank, for every 1%increase in debt to GDP ratio when it is already above 64% would slow down growth by 2% each year. Thus things were looking bleak even prior to the lockdown!

The current debt to GDP ratio (Mar 2020) for India is 72.1% (RBI). Moody’s Investors Service downgraded India for the first time in 20 years and expected its debt to GDP ratio to 80.5% due to GDP shrinkage and higher debt.

If this pans out to be true, India’s govt debt would be set back to what it was 17 years ago: almost 83% in 2003. It is not a simple matter of “thing will become okay once the pandemic is controlled”. It may years to revive the economy and maybe even a decade for govt debt to head back to pre-lockdown levels.

Those who criticise the inadequacy of the govt stimulus must recognize that it would only increase the debt to GDP ratio causing a higher set back in economic growth. Also, higher govt debt implies interest rates will have to increase sooner than later to reduce borrowing (although higher demand for gilts would keep yields low).


Govt borrowing is necessary to trigger economic growth but too much of is also a problem. There could be higher taxes or inflation. This is truly a difficult situation for the govt to be in. Almost in an instant, all our growth plans are up in the air and our economy has been pushed back at least a few years.

What does this mean for the retail investor? The stock market – if it does not crash any further – likely to wait to seem some semblance of a turnaround. This means muted returns for the next few years. So if you are invested in equity for the short-term please rethink your strategy.

For the remainder of this article, taxman Anjesh Bharatiya discusses the GOI debt status paper. This would help new investors understand the nature of govt borrowings and its initial aim (at least vision) prior to the lockdown and how much the pandemic has disrupted the economy and in particular govt spending.

Also by Anjesh:

Status Paper on Government Debt 2018-19

The Central Government has recently released the Ninth Edition of the Status Paper on Government Debt, which provides a detailed analysis of the Overall Debt Position of the Government of India. This report is being brought out by the Government since 2010-11.

The document covers details of the financing operations of fiscal deficit of the Central Government during the year 2018-19. It also analyzes various indicators of debt sustainability, i.e., Debt/GDP ratio, the ratio of interest payment to revenue receipts, shares of short-term Debt/ External Debt/ Floating Rate Bonds in total debt. The document also contains Debt Management Strategy of the Central Government for the financial years from 2019-20 to 2021-22 which will guide the borrowing plan of the Government.

The nature of Government Debt

Government liabilities are classified as debt contracted against the Consolidated Fund of India (defined as Public Debt) and liabilities in the Public Account, called Other Liabilities. Public debt is further classified into internal and external debt.

  • Internal debt consists of marketable debt and non-marketable debt. Government dated securities (bonds) and treasury bills, issued through auctions, together comprise marketable debt.
  • Intermediate Treasury Bills (Treasury bills of 14-day maturity) issued to state governments and select central banks, special securities issued to National Small Savings Fund (NSSF) against small savings, securities issued to international financial institutions, special securities issued to Public Sector Banks/EXIM Bank, other bonds like Sovereign Gold Bonds etc. are part of the non-marketable internal debt.
  • External Debt refers to money borrowed from a source outside the country. External debt is to be paid back in the currency in which it is borrowed.
  • Other Liabilities include liabilities on account of State Provident Funds, Reserve Funds and Deposits, Other Accounts, etc.

Key Findings of the paper

  • According to the paper, the overall debt to GDP ratio of Centre and states declined from 68.7 % in March 2018 to 68.6 % or Rs 130 lakh crore in March 2019.
  • The debt of central government dropped marginally from 45.8% in 2017-18 to 45.7% or Rs 86.73 lakh crore in 2018-2019.
  • Government is primarily resorting to market-linked borrowings for financing its fiscal deficit.
  • The external debt was 2.7% of GDP or Rs 5.12 lakh crore. At current exchange rates, external debt stood at 5.9 per cent of Central Government’s total liabilities and 6.8 per cent of Public debt at end-March 2019. Since this constitutes a very small proportion of the overall borrowing of the Government, the finances of the Government are not subject to currency rate risks to a large extent.
  • The entire external debt was from official sources (mostly from multilateral institutions like various arms of the World Bank). Therefore, the Government’s finances are well insulated from volatility in the international markets.
  • The Average Interest Cost (AIC) of the Centre remained unchanged in the year 2018 to 2019 at 7.1%. The AIC of states, however, reduced to 7% from 7.2% in the preceding period.
  • Most of the Government debt was contracted at fixed interest rates, with only debt equivalent to 0.9% of GDP being issued at floating interest rates. Therefore, Government debt is largely secured from interest rate volatility preventing any excessive increase in interest payments. State Governments do not issue any floating rate debt.
  • Nominal GDP growth net of AIC was 3.9% in 2018-19. Since the AIC is well below the nominal GDP growth rate, India is comfortably placed in terms of sustainable debt parameters.
  • Around 94.1% of Centre’s liabilities consist of domestic debts, of which 84.4% or Rs 59.68 lakh crore was made up of marketable securities. In 2017-18, 86.1% of domestic debt was made up of marketable securities.
  • Analysis of domestic debt shows that 40.3% was held by commercial banks, 24.3% by insurance companies and 5.5% by provident funds. In March 2018, commercial banks held 42.7% of the Government’s domestic debt and therefore, in 2018-19, there was some movement away from over-reliance on banks.
  • The tenure of the longest security was 37 years. The weighted average residual maturity of outstanding dated securities in March 2019 stood at 10.4 years compared to 10.62 years in March 2018. Thus, the Government needs to make more efforts to increase the maturity profile of its debt to reduce roll-over risk (A risk associated with the conversion of maturing debt to new debt at unfavourable interest rates leading to higher interest payments in the future).
  • In the medium term, 28.27% of outstanding dated Government securities had a residual maturity of up to 5 years. Thus, there was a relatively small roll-over risk in the medium term. Of this, almost 50% of the debt is to mature in 2022-23 to 2023-24 suggesting elevated roll-over risk during that period. The government manages the roll-over risk through buy0back and switching of shorter tenure Government securities with longer tenure Government securities. During 2018-19, Government carried out switches worth Rs 28,059 crore as against Rs 58,075 crore in 2017-18. There were no buy-backs conducted by the Government during 2018-19.
  • The weighted average maturity of dated securities issued during 2018-19 increased to 14.73 years from 14.13 years in 2017- 18. The weighted average yield was 7.77% for the fresh issuances made during 2018-19.
  • Interest payments to revenue receipts ratio (IP-RR ratio) of the Centre stood at 37.5% in 2018-19 as compared to 35.6% in the preceding year. The number for the states was 11.2%, down from 12.8% in FY 2017-18. This ratio is an indicator of the Government’s ability to make interest payments on its debt from its regular income (revenue receipts).

N K Singh Committee

A panel under former Revenue Secretary, N.K. Singh was constituted by the Government in May 2016 for reviewing the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Among other things, the committee recommended a debt to GDP ratio as a target for fiscal policy. Although the Government did not formally adopt the recommendations of the panel, a conscious effort is still being made to limit the debt to GDP ratio closer to the limit prescribed by the committee. Some of the major recommendations of the committee were:

  • The Committee suggested using debt as the primary target for fiscal policy.
  • Overall debt to GDP ratio of 60% should be targeted by 2022-2023 with a 40% limit for the Centre and 20% limit for the states. This limit was found to be consistent with international best practices and was an essential parameter to attract a better sovereign rating from credit rating agencies.
  • To achieve the targeted debt to GDP ratio, the committee proposed annual targets to progressively reduce the fiscal and revenue deficits till 2023.
  • The Committee suggested that grounds on which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances.
  • Further, the government may be allowed to deviate from the specified targets upon the advice of the Fiscal Council in the following circumstances
  • considerations of national security, war, national calamities and collapse of agriculture affecting output and incomes,
  • structural reforms in the economy resulting in fiscal implications, or
  • a decline in real output growth of at least 3% below the average of the previous four quarters.

Government debt as on March 2019 was well within the various debt sustainability parameters. Some positive aspects were low external borrowing, low floating rate debt, comfortable IP-RR ratio and lower amount of short-term maturity debt. However, in the wake of the COVID-19 pandemic, the Government has had to raise the estimated gross market borrowing for FY 2020-21 to Rs 12 lakh crore from Rs 7.80 lakh crore as per Budget Estimates (BE) 2020-21.

This clearly emphasizes the slump in revenue due to the extended lockdown as well as sustained expenditure pressure on COVID-19 related costs. Higher government borrowing not only reflects a precarious fiscal situation but will also lead to higher interest rates for private borrowers competing with the Government for the same money. Therefore, the coming months will be a treacherous period for Government finances and the Finance Ministry & RBI will have to be on their toes to manage the burgeoning borrowing coupled with reduced revenue.

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