By Vatsal Nahata
An important but often overlooked argument in India’s public debt policy revolves around who ultimately finances and owns the stock of debt. India’s public debt to GDP ratio in 2021 stood at 83.4% with only 3% denominated in foreign currency and 4% being held by non-residents. Even the small foreign currency-denominated debt is largely from official sources and on concessional terms. With a long average maturity of about 12 years, India’s stock of debt is mostly on fixed-rate terms.
This implies that government-owned financial institutions are the major holders of government debt. Simply put, the Government itself is the largest holder and financier of public debt through equity ownership in public and private sector banks, insurance companies and the RBI.
For these entities, debt securities feature as an asset on the balance sheet and interest payments from the sovereign act as key sources of revenue. While the Reserve Bank remits most of its income to the Finance Ministry, commercial banks and insurance companies use the interest from government securities to pay interest on customer deposits, insurance annuities, small savings schemes and retirement plans. These ultimately accrue to large swathes of low-income and middle-class families in India. Therefore, a silver lining in India’s public debt management lies in the fact that the sovereign lends essentially to itself, its interest and principal payments largely stay within the domestic economy and its debt policy does not result in significant capital outflows.
Importantly, a key predictor of sovereign debt crises lies in the ownership of public debt. The Financial Crisis and COVID-19 pandemic have shown how countries like Greece, Portugal, Argentina and Pakistan suffered tremendously when foreign creditors refused to refinance and restructure public debt. The ensuing sovereign debt crises have caused severe macroeconomic damage to these countries. On the other hand, India’s domestic ownership of public debt has played a crucial role in helping it navigate negative spillovers from international financial markets (such as the bankruptcy of Lehman Brothers, the Taper Tantrum of 2013, and subsequent quantitative tightening).
Even presently, the G-20 (under India’s presidency) is grappling with sovereign debt restructuring negotiations amongst Paris Club creditors and China (which has emerged as the largest creditor to many countries). Consequently, ownership of public debt is increasingly becoming crucial to sound geopolitical management and national security.
From a policy perspective, therefore, the impact of public debt on variables like income redistribution, investment and debt sustainability must explicitly account for patterns of debt ownership rather than merely looking at the absolute or relative levels of debt.
Notwithstanding its fiscal management, India must also be mindful of debt sustainability risks stemming from slower GDP growth, and high levels of interest payments as a ratio of revenue receipts which reduce the scope for countercyclical fiscal policy and social spending on education, health, and infrastructure, and regaining fiscal space for future crises through deficit consolidation and debt reduction.
(Vatsal Nahata is a Research Analyst at the International Monetary Fund (IMF). Views expressed are author’s own.)