India’s Public Debt Servicing Costs Projected to Hit Rs. 6.4 Trillion in Fiscal Year 2021-22

Pakistan Faces $6.4 Trillion Debt Challenge as IMF Review Looms

Islamabad – As a visiting International Monetary Fund (IMF) mission assesses PakistanS financial health, the goverment has unveiled a borrowing plan of approximately Rs6.4 trillion to service its total public debt of Rs81.5 trillion as of June 30. the Ministry of Finance revealed their Annual Borrowing Plan for FY26, in accordance with the Fiscal Responsibility and Debt Limitation Act (FDRLA).

The plan projects net domestic borrowing of Rs6.395 trillion during the current fiscal year, aligning with the Medium-Term Debt Management Strategy 2026-28 (MTDS), which is informed by the FY26 budget’s macroeconomic and fiscal projections.

The government will heavily rely on domestic borrowing to cover the estimated federal fiscal deficit of Rs6.5 trillion.With a projected primary surplus of Rs1.706 trillion, and total annual interest expenditure budgeted at Rs8.207 trillion, the remaining deficit will be financed through a combination of sources. External debt servicing is estimated at Rs1.009 trillion, with domestic interest expenses at Rs7.2 trillion.

Borrowing strategies will be implemented through quarterly auction calendars, prioritizing domestic sources.To strengthen its debt position, the finance ministry plans to increase the proportion of long-term, fixed-rate instruments, and introduce more diversified instruments like Shariah-compliant options and Zero-coupon Bonds. The domestic financing plan centers on minimizing net issuance of T-Bills while refinancing existing quarterly, biannual, and annual instruments.

A meaningful focus will be placed on Pakistan Investment Bonds (worth Rs4.336 trillion) and Sukuks (worth Rs1.895 trillion). The government also intends to expand Zero Coupon Bonds to attract long-term institutional investors and broaden the investor base.To further diversify the debt portfolio, the authorities are increasing Shariah-compliant instruments, specifically focusing on institutional investors through fixed-rate Sukuk participation.

Currently, the Debt Management Office is exploring structures like Ijarah, Wakalah, and Murabaha to expand the composition of shariah-compliant instruments within the overall debt structure. Moreover, plans are underway to create a Shariah Compliant yield Curve, collaborating with relevant stakeholders to facilitate this initiative.

External financing of $364 million (equivalent to Rs106 billion) is also anticipated. The External Financing Plan will prioritize multilateral loans valued at $1.9 billion and bilateral deposit rollovers totaling $4 billion from China and $5 billion from Saudi Arabia, alongside raising $400 million through Panda and Sustainable Bonds. Eurobond maturities worth $1.8 billion will be repaid.

Gross Financing Needs (GFN) as a percentage of GDP are projected to decrease to 21% by FY2026, a reduction supported by fiscal consolidation leading to a lower fiscal deficit, a primary surplus, and reduced debt principal and interest payments. Total public debt was recorded at Rs80.5 trillion as of June 2025, comprised of Rs54.5 trillion in domestic debt and Rs26 trillion in external debt.

What are the primary components that constitute India’s Rs. 6.4 trillion public debt servicing costs?

Understanding the Scale of India’s Debt Burden

In Fiscal Year 2021-22, India faced a significant increase in its public debt servicing costs, projected to reach a substantial Rs. 6.4 trillion. This figure represents the total amount of interest payments the government needed to make on its outstanding debt. Understanding this number requires a deeper dive into the components of India’s government debt, the factors driving these costs, and the potential implications for the Indian economy. This analysis will cover India’s fiscal deficit, sovereign debt, and the impact on economic growth.

Breakdown of the Rs. 6.4 Trillion Figure

the Rs. 6.4 trillion figure isn’t a single, monolithic expense. It’s comprised of interest payments on various forms of government debt, including:

* Internal debt: The largest portion, stemming from loans taken from within India – primarily through market borrowings (government securities) and small savings schemes.

* External Debt: Interest paid on loans sourced from foreign governments, international institutions (like the World Bank and IMF), and commercial lenders.This is impacted by exchange rate fluctuations.

* Ways and Means Advances (WMA): Short-term borrowing from the Reserve Bank of india (RBI) to manage temporary cash flow mismatches. While generally a smaller component,interest on WMA contributes to the overall servicing cost.

* State Government Debt: A significant portion of the overall public debt is held by individual state governments, and their servicing costs contribute to the national total.

Factors Contributing to Rising Debt Servicing Costs

Several key factors contributed to the projected increase in debt servicing costs for FY21-22:

* Increased Borrowing: The COVID-19 pandemic necessitated substantial government spending to mitigate the economic fallout.This led to increased government borrowing to finance stimulus packages and social welfare programs.

* lower Interest Rates (initially): While interest rates were initially lowered by the RBI to stimulate the economy, this effect was offset by the sheer volume of new debt issued.

* Global Interest Rate Trends: Rising global interest rates, especially in the US, put upward pressure on borrowing costs for emerging economies like india.

* Fiscal Deficit Management: A persistent fiscal deficit – the difference between government revenue and expenditure – requires continuous borrowing,adding to the debt stock and subsequent servicing costs.

* Rupee Depreciation: A weaker Indian rupee (INR) increases the cost of servicing external debt, as more INR is required to pay the same amount of foreign currency.

Impact on the Indian Economy: A Closer Look

High debt servicing costs have several potential ramifications for the Indian economy:

* Crowding out Effect: A larger portion of the government’s revenue is allocated to debt repayment,leaving less available for crucial investments in infrastructure,healthcare,and education – possibly hindering long-term economic growth.

* Reduced Fiscal Space: Limited fiscal space restricts the government’s ability to respond effectively to future economic shocks or implement new progress programs.

* Inflationary Pressures: To finance debt, the government may resort to monetizing the deficit (printing money), which can contribute to inflation.

* Sovereign Credit Rating: High and rising debt levels can negatively impact India’s sovereign credit rating, making it more expensive to borrow in the future.

* Impact on Social Sector Spending: Increased debt servicing can lead to cuts in essential social sector programs, affecting vulnerable populations.

Past Context: India’s Debt Trajectory

India’s public debt has been on a generally increasing trend over the past few decades.

* pre-1991: High levels of debt were a concern, leading to the 1991 economic crisis.

* Post-1991 Reforms: Economic liberalization and fiscal consolidation efforts helped to stabilize the debt-to-GDP ratio.

* Global Financial Crisis (2008-09): Increased borrowing to fund stimulus measures led to a rise in public debt.

* COVID-19 pandemic (2020-22): The pandemic triggered a significant surge in government borrowing, exacerbating the debt situation.

Government Strategies for Debt Management

The Indian government has implemented several strategies to manage its debt:

* Fiscal consolidation: Efforts to reduce the fiscal deficit through increased revenue collection and expenditure rationalization.

* Debt Buyback: Repurchasing outstanding government securities to reduce the debt stock.

* Liability Management: Actively managing the maturity profile of government debt to reduce refinancing risk.

* Promoting Foreign Investment: Attracting foreign investment to reduce reliance on debt financing.

* strengthening Public Financial Management: Improving the efficiency and clarity of government finances.

* Monetization of Assets: Selling off government assets to generate revenue and reduce debt. (e.g.,National Monetisation Pipeline)

The Role of the Reserve Bank of India (RBI)

The RBI plays a crucial role in managing government debt:

* Managing Government Securities Auctions: Conducting auctions of government securities to raise funds for the government.

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