In the short run, government debt may jump

The centre’s interest payments, which were about 48% of its net tax receipts in FY21 before averaging 43% in FY22, will increase again this fiscal year and may even cross the 50% mark in FY24. States’ interest spending could see a similar spike, narrowing capital expenditure from central and state budgets.

The impact of the rate hike cycle initiated by the Reserve Bank of India to control runaway inflation will be felt on government interest rates starting from H2 FY23, but will be more pronounced in FY24.

The FY23 budget estimates that the center’s interest payments will be 48.6% of its net tax receipts this year due to the sharp increase in borrowing size in FY21 (Rs. 12.6 trillion) and FY22 (Rs. 10.47 trillion), although funds were raised at a fine interest rate. Lending in FY23 is projected to increase by a record Rs 14.95 trillion, which will push the cost of short to medium term debt service to a much higher level with higher interest rates.

From a slight decrease of 70% in FY18, the ratio of general government debt to GDP has reached a very precarious level, close to 90% in FY21, as the Covid-19 epidemic has reduced revenue and increased the need for simultaneous spending. An expert committee on financial management recommended keeping the ratio at 60% to avoid debt going out of control. The expected-unexpected reversal of the trend in FY22 was a welcome one when the debt-to-GDP ratio fell to 85.2% mainly due to accelerated revenue flows.

Further restraint of the 84.3% ratio has been predicted by the RBI and this estimate may still be good as higher inflation will push the nominal GDP to a much higher level than expected. But this is clearly not the ideal way to control debt.

Based on the first advance estimate of the National Statistics Office (NSO), the budget estimates a nominal GDP growth of 11.1% in FY23, and based on the second advance estimate, the growth required to achieve the nominal GDP in the budget is only 9.1%. Nominal GDP growth, however, can be up to 14%, in terms of 7.2% real GDP growth estimated by the RBI and 6-7% in terms of GDP deflator.

On the positive side, the Centre’s net tax revenue in FY23 could be Rs 1.7 trillion more than the BE of Rs 19.35 trillion. The current fiscal surge, however, will slow down if economic growth continues to slow for the next few quarters.

To be sure, protracted geopolitical tensions – which the Center and the states could not have predicted when they budgeted for FY23 – are going to change drastically, tax receipts, the size of nominal GDP and affect the size of the government. . Debt

States have also seen spikes in their interest payments with many states, leading to debt stability problems. States’ total interest payments increased from approximately Rs 2.93 trillion in FY18 or 17% of their total tax receipts (own receipts and devolution funds received from the Center) to about Rs 3.62 trillion or 20% of total tax receipts in FY21 and seen in FY22. Was about 20%.

The RBI estimates that after the FY22 is moderated to 85.2%, the general government debt-to-GDP ratio, under baseline conditions, may remain sticky at about 84% of GDP over the next five years, but warns that it will remain at 89.1. Could be worse % Of FY27 if economic growth from FY24 stops at 5%. This serious assumption seems more realistic in light of recent macroeconomic developments.

The center’s ballooning budget deficit in FY21 pushed its debt-to-GDP to a 14-year high of about 59% in FY21. In that year, the total debt of the states reached a 15-year high of 30.1% of GDP.

According to their respective budget estimates, the states with the highest debt-to-GSDP ratio in FY22 are Punjab (53.3%), Rajasthan (39.8%), West Bengal (38.8%), Kerala (38.3%) and Andhra Pradesh (37.6%). As a result, Punjab’s annual debt service liability is almost equal to its annual total debt, which leaves little resources for wealth creation.

“For state governments as a whole, our initial expectation is to issue a gross SDL (State Development Loan) of 8. 8.4 trillion in FY23, although the adjustment of off-budget borrowings, and the transition to central, could be a bad thing. At the same time, yields are expected to be stronger during FY23, which will create upward pressure on interest payments going forward, ”said Aditi Nair, chief economist at ICRA.

Following a surprise rate move by the RBI on May 4, the 10-year central government securities (G-sec) yield closed at 7.38%, the highest in three years. Analysts expect benchmark yields to be in the range of 8-8.5% soon. Many states may need to increase SDL by 50 bps more than G-sec.

“While recovery in the growth rate will reduce the debt-to-GDP ratio, the Center and the states should focus on further growth-induced capex to bring the combined debt level down to about 80% in five years or more.” NR Bhanumurthy, Bangalore Dr. BR Ambedkar is the Vice Chancellor of the School of Economics University. The question, of course, is whether this will be possible in the short term compared to the estimated subsidy costs due to global inflation in fertilizers, natural gas, chemicals and oil.