Covid-19 pandemic pushes Union govt's debt past Rs 100-trillion mark

Sudden jump of Rs 7 trillion in Q1 pushed debt to record; enhanced borrowing this year will add to the debt stock by FY21-end, weakening its sustainability

For the first time, the outstanding debt of the central government crossed the Rs 100-trillion mark ($1.26 trn at current exchange rate), at the end of June.
 

A quarterly report by the finance ministry’s department of economic affairs (DEA) shows while debt was rising gradually, the sudden jump of Rs 7 trillion in the first quarter of this fiscal year (April-June 2020, or Q1) — accentuated by the Covid-19 pandemic — pushed it beyond the Rs 100 trillion mark. This number is inclusive of the liabilities towards the public account, which comprises reserve funds and deposits, securities against special subsidies, among other liabilities.
 

India’s sovereign or public debt, which includes the domestic and external liabilities and excludes the public account liabilities, stood at Rs 92.3 trillion at the end of June.
 

Analysts have noted that sovereign debt could touch the level of 60 per cent of gross domestic product (GDP) at the end of FY21.

Currently, it stands at 43 per cent of GDP, according to the International Monetary Fund’s database (December 2019). India currently ranks 94th among 170 countries in terms of relative indebtedness, but could jump ranks this year owing to excess borrowing.
 

The Fiscal Responsibility and Budget Management rules of 2017 had recommended that public debt remains under 40 per cent of GDP by March 2023.
 

The Covid-19 pandemic has struck a body blow to government finances all over the world, and India is no exception. But the country’s fiscal position is such that even with a budgetary stimulus of just over 1 per cent of GDP, India’s debt is pacing ahead. This raises questions about debt sustainability.
 

Experts think that economic recovery will make debt sustainable once again, and underscore that the speed of recovery is crucial.

 

“As the nominal GDP is set to contract this year, tax revenues would be lower. On the other hand, additional expenditure is the need of the hour. This is set to expand debt, but the sooner we get into the growth phase, the better it is for debt sustainability,” said Ila Patnaik, professor of economics at the National Institute of Public Finance and Policy.
 

While the central government’s revenues are under stress, it has not compromised on expenditure to that extent yet.

From March-end to June-end this year, the jump in debt is across all categories: internal debt, which forms more than 85 per cent of the debt stock, as well as external and public account liabilities.
 

Internal liabilities include market loans taken via dated central government securities (G-Secs), treasury bills, securities against small savings, sovereign gold bonds and others. The Union government expanded its annual borrowing programme through market loans — from Rs 7.8 trillion (budgeted) to Rs 12 trillion — when the pandemic struck.

 

As repayments would be to the tune of Rs 2.4 trillion, the debt stock is expected to expand this year by nearly Rs 10 trillion, the fastest ever. More than half of the repayments for this financial year are already done, the DEA report shows.

About 28.6 per cent of the debt stock is to be repaid every year over the next five years. “The roll-over risk in debt portfolio remained low,” said the report.
 

However, one point is worth noting. Though the gross amount of government securities issues in Q1 of FY21 was 56 per cent more than that in Q1FY20, the volume traded in secondary markets declined by 18 per cent in the same period.
 

“The lower outright trading volume for G-Secs during the quarter was due to the outbreak of coronavirus and subsequent lockdowns in various parts of the country, reduction in trading hours of government securities market, subdued market sentiments on the back of selling pressure by foreign portfolio investors, an upward revision in market borrowings of the central government for FY21, and sovereign rating downgrade by Moody’s from Baa2 to Baa3,” finance ministry report noted.