India's debt has been rising at a significant pace, outstripping its GDP growth rate in recent years. For the fiscal year 2024, India's debt-to-GDP ratio is expected to remain around 85%, reflecting the increased borrowing levels undertaken by the government. On the other hand, the GDP growth rate is expected to be around 6.3-6.5% in 2024(

)(

This divergence indicates that while India's economy is growing, the rate of debt accumulation is higher, leading to concerns about fiscal sustainability. The increasing debt is driven largely by infrastructure investments, social welfare schemes, and public services, but it also leads to higher interest payments, crowding out spending on other essential sectors.

This imbalance between debt and GDP growth could pose risks in the future, especially if borrowing continues to grow faster than the economy's capacity to service the debt.

The situation you've described highlights a significant financial challenge for India. If India’s interest payments are set to reach $130.12 billion in 2024, and the total government spending is approximately $575 billion, this means nearly a quarter (22.6%) of the national budget will be dedicated to servicing debt. That’s a substantial burden for any country, particularly for a developing economy like India.

Key Issues:

1. High Debt Servicing Costs: Allocating such a large portion of the budget to interest payments reduces the fiscal space available for critical spending areas such as infrastructure, healthcare, education, and social programs. It limits the government’s ability to invest in long-term growth drivers.

2. Increasing Interest Payments: With a projected increase of 11–12% in interest payments for 2025, India’s fiscal stress could worsen. If this trend continues, even more of the budget will be diverted towards debt servicing, further constraining productive spending and development efforts.

3. Debt Sustainability: Rising interest payments are often a warning sign that a country’s debt is growing faster than its economy. If debt continues to increase at a higher rate than GDP growth, the debt-to-GDP ratio may spiral, creating long-term sustainability concerns.

4. Crowding Out of Other Spending: With such a large portion of the budget going towards debt servicing, there's less room for growth-oriented projects. Infrastructure investments, social programs, and subsidies may suffer, potentially hurting economic growth and public welfare.

Causes of Rising Interest Payments:

• Increased Borrowing: India has relied heavily on debt to finance its infrastructure projects and other government programs, leading to an expanding debt burden.

• High Fiscal Deficit: India’s fiscal deficit has consistently remained high, resulting in increased borrowing and a rising interest payment obligation.

• Rising Interest Rates Globally: As global interest rates have been increasing, especially in the wake of inflation and monetary tightening, India may be facing higher borrowing costs both domestically and internationally.

Long-Term Consequences:

• Fiscal Constraints: Continued reliance on borrowing without addressing the underlying structural issues could lead to a debt trap, where borrowing is used primarily to service existing debt rather than invest in future growth.

• Social and Economic Strain: High interest payments could force the government to cut back on welfare schemes, subsidies, and capital investments, impacting the most vulnerable sections of society and slowing down economic growth.

• Pressure on Currency and Inflation: Rising debt service obligations in foreign currency could put downward pressure on the Indian rupee and lead to inflationary pressures, further complicating economic management.

What Can Be Done?

1. Fiscal Reforms: India may need to undertake significant fiscal reforms to control its debt burden. This could involve cutting unnecessary spending, reducing fiscal deficits, and improving revenue collection, such as through better tax compliance or more efficient public sector management.

2. Structural Economic Reforms: Focusing on increasing productivity, boosting exports, and revitalizing the manufacturing sector could help reduce the need for borrowing by fostering economic growth and increasing government revenues.

3. Efficient Borrowing Strategies: India could explore better debt management strategies, including renegotiating existing debt, lengthening maturities, or borrowing at lower rates from international institutions.

Conclusion:

With interest payments set to consume an increasingly large portion of India’s budget, the government faces significant fiscal challenges in the coming years. Balancing debt servicing with the need for economic growth and development is crucial, and failure to manage this carefully could lead to long-term economic instability.