Fuel price debate: Interest payment a surging burden

NEW DELHI:  In August this year Finance Minister Nirmala Sitharaman initiated a fresh debate when she blamed the burden of interest on oil bonds issued by the UPA government responsible for the high fuel price.

“The previous government has made our job difficult by issuing oil bonds. Even if I want to do something I am paying through my nose for the oil bonds,”  Sitharaman said, triggering a debate on the mounting burden of payment of interest.

According to the finance minister, the UPA government, instead of giving direct subsidy to oil companies, issued them oil bonds totalling Rs 1.34 lakh crore and for the last seven fiscals, the government has been paying over Rs 9,000 crore interest annually on these oil bonds.

Many economists did not find much merit on this argument as they said that the annual interest burden is miniscule, compared to what the government earned on excise duty collected on petrol and diesel.

However, it shifted focus back on the mounting burden of interest payment on the central government, which has gone up from Rs 4.27 lakh crore in 2014-15 to a whopping Rs 6.93 lakh crore on the overall interest outgo in the financial year 2020-21.

The latest data by the CGA suggest that till September, 2021 the government’s total revenue expenditure stood at Rs 13,96,666 crore, of which Rs 3,63,757 crore was on account of interest payments and Rs 1,80,959 crore was on account of major subsidies. 

Going by the government’s own projection this number is expected to go up further to be Rs 8.1 lakh crore in FY22, up by 16.9% year-on-year (YoY).

This is higher than the projected14.9% growth in central government tax revenues and payment to oil bonds is just a fraction of it.

However, it was not only UPA, which was responsible for the bonds, which was left to be repaid by the subsequent government.

Take for instance the interest burden of bank recapitalisation bonds, which were issued in 2017 by then Finance Minister Arun Jaitley to strengthen banks’ balance sheet so that they could meet the regulatory norms under the Basel-III guidelines.

Since then the government had issued recapitalisation bonds to banks worth Rs 3.1 lakh crore, as per the Budget documents. 

And it came with its own interest burden. During 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in capital in the PSBs.

In the subsequent year, according to official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs and was up further, and till last fiscal year (FY 21), government ended up paying Rs 48,000 crore for these bonds.

Experts claim assuming that no further issuance happens, still it will end up paying over Rs 2 lakh crore till FY28 and have to repay about Rs 21,000 crore in 2028, then Rs 40,000 crore annually between 2029 and 2033, and nearly Rs 20,000 crore in 2034.

While the government has made efforts to curtail subsidy burden, economists and rating agencies have already warned that this burden of interest payment as India’s government debt mounted to about 90% of gross domestic product (GDP) in the wake of the Covid-19, which can potentially inflate interest payments.

“(India’s) debt affordability will remain relatively weak with interest payments reaching about 28% of general government revenue in 2021, the highest among Baa-rated peers and more than three times the Baa median forecast of around 8%.” Moody’s had said last month.

Moody’s said that debt will stabilise at around 92% of GDP by FY25.  And as the government is preparing for the Budget for the financial year 2022-23, it is aware of the challenge, taking these numbers into account.

“It has been an exceptional year, yet we managed to be prudent at the same time cleaning up the accounting practices in last few years. Interest payment is not that bad if the investment cycle is bad and the revenue growth is high. Yet we are careful that this should not grow out of proportion,” a senior finance ministry official said.

Matter of interest

Interest payment in FY15  Rs 4.27 lakh crore.

Interest outgo in FY21 Rs 6.93 lakh crore.

Total revenue expenditure Rs 13,96,666 crore.

Interest payment Rs 3,63,757 crore.