Need to Rationalize Rising Interest Burden on Public Debt of the Central Government

Abstract

Interest payments are significant component of expenditure, and are a part of the obligatory category of expenditures of the government. A substantial share of the tax collections of the government of India is taken away by interest costs. In 2014-15, interest payments were 3.3 per cent of the GDP. In 2014-15, while net interest payments (difference between the interest payments and interest receipts) were around 23 per cent of the total receipts, this spending blocked over 34 per cent of the revenue receipts. High interest payments could put off other developmental activities due to availability of lesser funds. It is therefore imperative to look into measures to reduce borrowing costs. Some of the components of domestic borrowings, as also interest payments are examined in the paper. This paper explores approaches to reduce interest expenditure incurred by the central government and considers possible options by which interest cost savings could be attempted.

Keywords: Interest Payments, Revenue Expenditure, Inflation Indexed Bonds, Buybacks