Public debt in India at Rs 4,9604.72 billion was 43.7% of GDP by end-September 2014. An overwhelming 91.7% of this debt was internal and only 8.3% was external debt. India Ratings & Research (Ind-Ra) believes that the financing of public debt primarily through domestic savings is a big positive for the Indian economy. However, elongating the maturity profile of the dated securities issued FY11 onwards was not the right strategy, especially given the rising interest rates. On the outstanding internal debt, each basis point movement in yield has costed public exchequer Rs 4.16 billion per annum.
Government followed this strategy at the turn of the new millennium as well. However, the rationale to do so has to be understood in the context of the fiscal situation and the market condition prevailing at that time. Around that time, fiscal deficit was high and the Reserve Bank of India was pursuing an accommodative monetary policy in view of low GDP growth and low Wholesale Price Index inflation. As a result, the weighted average yield on the new issuance declined to 5.71% in FY04 from 10.95% in FY01 and the weighted average maturity period peaked at 16.9 years in FY06. As the regulator reversed the course of the monetary policy August 2005 onwards, the weighted average maturity period of the new issuance was brought down to 11.16 years in FY10.
Ind-Ra believes that the shortening of the tenor of the new debt in view of rising interest cost was a step in the right direction. However, instead of sticking to this game plan the government started elongating the maturity profile of the new issuances from FY11 despite (i) a rise in the cost of borrowings and (ii) a low rollover risk. Only around 6.0% of the outstanding debt was needed to be rolled over every year during this period.
According to revised estimates, interest servicing in FY14 at Rs 3800.66 billion alone accounted for 36.9% of the total revenue receipts of the central government. India's general government debt at 64.7% of the GDP in FY14 was 1.62x of the 'BBB' rated peer group's 40.0% median. Also due to a smaller revenue base, India's interest/revenue and debt/revenue ratio is much higher than that of other 'BBB' rated economies. In FY14, the country' debt/revenue was 3.1x compared with the 'BBB' rated peer group's median value of 1.5x. This makes India highly vulnerable to growth cycles and an outlier among the 'BBB' category economies. Clearly, having a maturity profile of a shorter duration on government borrowing during the period of rising interest cost would have been a more prudent strategy, but the government chose to do otherwise.
