The fiscal profligacy of the UPA government is starting to hurt when it comes to repayment of borrowings. Government bonds worth Rs 1567 billion (Rs 1,56,700 crores) is coming up for redemption in fiscal 2014-15. In the fiscal years 2015-16, 2016-17, 2017-18 and 2018-19, government bonds worth Rs 1146 billion, Rs 2312 billion, Rs 2567 billion and Rs 2424 billion are coming up for redemption respectively.
The government does not meet bond redemptions from its earnings. It meets bond redemptions by issuing more bonds. In fact for fiscal 2014-15, the government was able to show lower gross borrowings by resorting to bond switches and through issue of treasury bills.
The period 2008-09 to 2013-14 has seen the government more than tripling its debt from Rs 11,000 billion to Rs 35,000 billion. The result of the huge debt increase is that every year the government would have to borrow more from the market to pay back bond holders.
The new government taking office in 2014 is going to have a tough time to manage bond redemptions.
It is imperative that the economy grows at a much faster pace than the growth rate of 4.5% and 4.9% seen in fiscal years 2012-13 and 2014-15. The new government would have to show higher revenues just to service its debt. Interest payments on debt accounts for 80% of estimated government borrowing for 2014-15. Interest payments and bond redemptions would push up government borrowing higher every year, and if RBI maintains tight policy and global investors are cool to Indian bonds, the system will have a huge problem in absorbing the borrowings.
Apart from revenue growth, the government would have to continue to carry out bond switches to ease the pain of servicing debt.