India’s debt burden likely to reach Rs 181L crore in FY25

The total debt has reached alarmingly high levels, with both Central and State government borrowings now at unsustainable levels, particularly for State governments. Political factors heavily influence this trend, as coalition governments often increase debt to fund populist campaigns and programs, creating an illusion of unlimited resources. State governments follow a similar pattern.

This irresponsible borrowing leads to inflation by increasing the money supply and keeps interest rates elevated, creating a vicious cycle that is hard to break. Over time, this results in gross fiscal mismanagement, often culminating in stagflation—a scenario of stagnant economic growth coupled with persistent inflation.

The consequences for the economy are severe, as seen in the United States, where rate cuts have become a double-edged sword, complicating the economic outlook.

Talking to Bizz Buzz, MV Hariharan, former treasury head, SBI said, “In India there are states like Karnataka, Kerala, AP, Bihar to name a few who are at their peaks in borrowing from RBI and the consequent logjams in even honouring their liabilities like pension payments are now becoming impossible.”

The military standoff in Ladakh valley too is draining much of the funds available for other initiatives like education and health. Subsidies are a big drain on the financial situation but unavoidable in the political context. Raising taxes is unpopular apart from being discredited as a revenue seeking alternative.

The recent budget if carefully scrutinized and read between the lines amply reflects the realities and the compelling priorities of the Central government. Anil Kumar Bhansali, head of treasury and executive director, Finrex Treasury Advisors, said, “The outstanding internal and external debt and other liabilities of India at the end of 2024-2025 is estimated to Rs 181.68 lakh crore, as against Rs 168.72 lakh crore at the end of 2023-2024 (RE).”

Internal debt comprises loans raised in the open market, compensation and other bonds, etc. It also includes borrowings through treasury bills including treasury bills issued to State governments, commercial banks and other investors, as well as non-negotiable, non-interest bearing rupee securities issued to international financial institutions.

The amount outstanding under internal and external debt reflects the liability of government as represented by the book value of the outstanding debt. The outstanding stock of external liabilities is reckoned at historical rates of exchange on which the liability was initially accounted for in the books of accounts after netting the repayments made at current exchange rates. In addition, government is liable to repay the outstanding against the various small savings schemes, provident funds, securities issued to Industrial Development Bank of India, and nationalized banks, oil marketing companies, fertilizer companies, food corporation of India and deposits under the special deposit scheme and depreciation and other interest bearing reserve funds of departmental commercial undertakings, etc., deposits of local funds and civil deposits. Public debt is the total amount, including total liabilities, borrowed by the government (including State governments) to meet its development budget. It has to be repaid from the consolidated fund of India. The term is also used to refer to overall liabilities of Central and State governments, but the Union government clearly distinguishes its debt liabilities from the State governments. The source of public debt are dated government securities, (G-Secs), treasury bills, external assistance and short term borrowings. As per RBI act, 1934, the RBI is both the banker and public debt manager for the Central and State governments. The RBI handles all the money, remittances, foreign exchange and banking transactions of Central and State governments. The Union government’s liabilities account a little of over 57 per cent of India’s GDP while State governments account for another 27 per cent thus constituting about 84 per cent of the government debt against GDP. It is much better than a number of developed countries.

Most of the repayments include interest payments by the government which do poses challenges for fiscal management. But, if you look at our tax revenue both indirect and direct, they have been growing at 20 per cent or more during the past five years. There is a fundamental asymmetry since the US can print dollars to finance deficits, advance economies could borrow at low rates but the emerging economies are always left to rating downgrades which does not allow them to borrow at lower rates due to their lower credit ratings. India is a case that despite keeping its public debt to GDP ratio low the country’s rating has never gone up to levels where they can keep the borrowing costs low.

The IMF and World Bank always cite that India needs a more ambitious fiscal consolidation roadmap to ensure medium-term debt sustainability amid growing risks to its growth outlook and shrinking fiscal space, the government however, differed saying that public debt has remained sustainable. The debt is projected to ease to 80.5 per cent in 2028, given the fiscal consolidation path and improving growth prospects.w