Govt aims to reduce short-term debt, increase external debt by FY25

However, the status paper maintained that the risk profile of India's government debt stands out as safe and prudent

To minimise risks and lower borrowing costs, the Centre aims to reduce the share of short-term debt of the outstanding marketable debt stock to 11 per cent by FY25 from 12.13 per cent in FY22.

However, the Centre sees scope for increasing the share of external debt in the outstanding public debt stock to 7 per cent from 5.43 per cent during the same period.

As part of the “Status Paper on government debt”, put out by the Union finance ministry last month, the medium-term debt strategy (MTDS) aims to continue with the rationalisation of interest rates on small savings schemes and other instruments like the provident fund and special securities in line with the interest rates prevailing in the economy. It also aims to support diversifying the investor base of the government securities market, lengthen the maturity profile of the debt portfolio, and build up a liquidity buffer for better cash management.

“Going forward, it is important to ensure that there is an improvement in liquidity in the secondary market in G-Secs through higher turnover and an increase in number of market participants in order to minimise the interest rate risk emanating from illiquidity premium for dated securities. As in the past, measures to improve liquidity in the G-sec market would include continuation of security consolidation and building critical mass under benchmark securities,” it said.

The MTDS provides a framework within which the debt management authorities can make informed choices on how the government’s financing requirements should be met, while taking due account of constraints and potential risks to maintain debt sustainability.

On issuing sovereign gold bonds (SGBs), the status paper said such issuances would be limited to 2 per cent of the annual gross issuance of dated securities in a financial year and subject to a limit about 1 per cent of outstanding government securities, keeping in view the need to minimise potential price risks coming from higher gold prices at the time of redemption.

However, the status paper maintained that the risk profile of India’s government debt stood out as safe and prudent.

“Public debt in India is largely funded through domestic sources by primarily issuing fixed interest rate instruments and is supported by a large domestic institutional investor base,” it added.

“The relatively long maturity profile of India’s debt reduces roll-over risk. These factors underlie long-term debt sustainability in the Indian context.” 

The maturity profile of debt, its composition, cost, and share of external debt in central government liabilities are some of the important parameters to assess debt sustainability.

The MTDS seeks to reduce the cost of borrowing for the government in the medium and long terms through issuing appropriate instruments and by controlling roll-over risks by lengthening maturities and switching/buying back securities. During 2021-22, the government carried out switches worth Rs 1.7 trillion as compared to Rs 1.5 trillion in 2020-21.

“In the Budget for 2023-24, the amount of switch operations for the year 2022-23 was revised to Rs 1,05,490 crore to reduce the redemption pressure in the coming years,” it added.

Though the annual repayment of outstanding stocks of dated securities issued by the central government is set to increase from 2023-24 — both in absolute terms as well as relative to estimated GDP — the status paper hinted the government would adopt buybacks and switches of shorter-tenor G-Secs with longer-tenor G-Secs to spread the redemption pressure evenly and reduce the roll-over risks.