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Government's ballooning interest payments — the elephant in the room

economy | Jan 24, 2023 6:52 AM IST

Government's ballooning interest payments — the elephant in the room

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Interest payments on government borrowings have shot up by 38 percent to Rs 9.40 lakh crore, in just the last two years. This is higher than the income tax or corporate tax collection aim of Rs 7 lakh crore set out for each head this year. At Rs 9.40 lakh crore, interest payments now constitute 3.4 percent of the revised GDP for FY23. With interest rates having risen this fiscal year, and borrowing likely to expand, the government’s interest payments are expected to only go up further in the upcoming Budget.

The fiscal disruption caused by COVID-19 and the Ukraine conflict, is likely to continue impacting the fiscal for the next two to three years, a close read of the Budget numbers indicate.

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Not only have higher borrowings been financing the government’s growing expenditure in the last two to three years, but there is a massive jump in the its interest payments as well.
Probably this trend started showing signs in the pre-Covid years , when borrowings and corporate tax collections were running neck-to-neck as the main financiers of the Budget.
However, till 2018-19, interest payments were not the single-largest expense for the Centre. Instead, 23 percent to 24 percent of the Budget was earmarked as the states share of Central taxes , with the government's interest payments constituting the second-largest outgo , roughly consuming 18 percent of the Budget.
However, from the FY2020-21 Budget, this trend changed. Government borrowings became the single-largest source of finance for government expenditure, unseating corporate taxes as the single-biggest source of revenue. Consequently, the share of states in Central taxes also took a hit in that year.
Thereafter came the COVID-led disruption and today, 35 percent of this year’s Budget is running on borrowings. With corporate taxes financing just 15 percent of the Budget. Even both put together, personal and corporate taxes are financing only 30 percent of the Budget.
As a result, interest payments on government borrowings have shot up by 38 percent to Rs 9.40 lakh crore, in just the last two years. This is higher than the income tax or corporate tax collection aim of Rs 7 lakh crore set out for each head this year. At Rs 9.40 lakh crore, interest payments now constitute 3.4 percent of the revised GDP for FY23.
With interest rates having risen this fiscal year, and borrowing likely to expand, the government’s interest payments are expected to only go up further in the upcoming Budget.
All in all, borrowings today form the biggest source of government receipts , against direct tax collections earlier — probably indicating that despite a healthy growth in tax revenues, much more needs to be done. Interest payments are also the single-biggest expenditure incurred by the government, against devolution of Central taxes to states earlier.
This also raises questions on the government’s fiscal consolidation efforts and the quality of the deficit, with half of the government's total borrowings annually diverted only towards interest payments.
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