Debt management: A critical issue for budget FY25 – Dr. Debapriya

Originally posted in The Business Standard on 6 June 2024

The debt stress in the budgetary framework for the fiscal year 2024-25 (FY25) is showing up.

It is manifested most in the financing framework of the Annual Development Programme (ADP).

The size of the ADP has been fixed at 5% of the GDP, down from 5.5% in FY24. Yet, the government is currently not able to contribute any revenue surplus in financing the ADP.

As a result, the full ADP has to be underwritten by borrowed resources. Two-third of this is expected to come from domestic savings. Banking sector is expected to provide 60% of the domestic borrowing.

The loan-dependent development financing ultimately gets reflected in the increased debt servicing liability of the government. In FY25, almost a quarter of the government operating expenses was attributable to interest payment. Curiously, domestic sources account for 85% of the government’s debt servicing liability in FY25.

On the other hand, annual foreign debt servicing liability is increasing quite dramatically. In FY25, the country would need to pay back almost $2 billion. Indeed, we are failing to pay back outstanding foreign dues amounting to more than $5 billion given the overall fragile situation of the external balances.

As reflected in the depleting foreign exchange reserve of the country, debt management would be one of the crucial issues in the upcoming fiscal year.

Dr Debapriya Bhattacharya is a Distinguished Fellow at the Centre for Policy Dialogue (CPD)