Interest Payments Liability :-

The Indian Economic Survey 2002-03 has dealt with the topic of Interest Payment Liability in para 2.18 on Page 30 and table 2.4 from page 31.

2.18 Interest payments is the single largest item of expenditure on the revenue account. In the Budget for 2002-03, interest payments are budgeted at Rs.1,17,390 crore constituting 34.5% of revenue expenditure and 47.9% of net revenue receipts of the Centre. There has been a considerable increase in the growth of interest payments over the years. The increase in the interest liability is the outcome of rising fiscal deficits and recourse to market borrowings to meet the deficits. With the Government borrowings at market determined rates of interest, the average cost of borrowing has considerably increased in the 1990s. The weighted average interest rate on market borrowings increased from 7.0% in 1980-81 to a peak level of 13.8% in 1995-96. Thereafter, interest rates have started softening. In 2001-02, the weighted average interest rate on market borrowings came down to 9.4%. This reduction in the cost of borrowing is also on account of elongation in the maturity profile of the loans raised during the year. The weighted average maturity on loans increased from 10.6 years in 2000-01 to 14.3 years in 2001-02. A similar trend is observed in respect of the average cost of total internal liabilities of the Central government (Table 2.4). The current year has witnessed a drastic reduction in the average cost of market borrowing to 7.5% (April-October). This is the result of excess liquidity with the banking system and commercial banks investments in Government security at lower interest rates.

Scheduled commercial banks are currently holding over 37% of their net demand time liabilities in Government securities as compared with the statutory liquidity ratio (SLR) of 25%. This situation may change once credit off-take by the commercial sector picks up. Interest Payments exert considerable pressure on the finances of the Central Government curtailing its manoeuvrability to rein in the growth of revenue expenditure. The problem will continue as long as fiscal consolidation remains intractable.

SUBSIDIES :

The topic of subsidies has been dealt with in the Indian Economic Survey 2002-2003 in para 2.19, page 31, which is reproduced as under :-

2.19 Expenditure on major subsidies is budgeted at Rs.38,923 crore in 2002-03 as compared with an expenditure of Rs.30,094 crore in 2001-02 (Prov.). The subsidies budgeted in the current year absorb nearly 16% of the net revenue of the Centre and constitute 11.4% of the total revenue expenditure. Expenditure on major subsidies, which constituted 1.7% of GDP in 1990-91, had come down to 1.0% of GDP in 1996-97. Thereafter, it stabilized at around 1.2% of GDP. Expenditure on major subsidies budgeted in the current year constitutes 1.6% of GDP, which is higher than the subsidies GDP ratio observed in the last five years. With the dismantling of the administered price mechanism for petroleum products from April 1st 2002, the Budget for 2002-03 made an explicit provision of Rs.6,495 crore towards payment of subsidies for domestic LPG, kerosene supplied through public distribution system (PDS) and freight subsidy for remote areas. This has raised the budgeted expenditure on major subsidies in 2002-03.

GOVERNMENT DEBT :

The topic of the Government Debt has been dealt with in the Economic Survey 2002-03 in para 2.22 and 2.23 on page 32.

2.22 The outstanding liabilities of the Central Government, comprising internal and external liabilities, Which registered a declining trend as a proportion to GDP till 1998-99, have started rising thereafter. The outstanding liabilities-GDP ratio which declined from 55.3% in 1990-91 to 51.2% in 1998-99 increased to 58.1% in 2001-02 (RE). The outstanding total liabilities are budgeted to increase to Rs.15,04,183 crore in 2002-03 reaching a level of 61.4% of GDP. The increase witnessed after 1998-99 was mainly on account of increase in internal liabilities increased from Rs.7,22,962 crore to Rs.14,35,663 crore. The external debt has been declining as percentage of GDP over the year. External debt-GDP ratio declined from 5.5% in 1990-91 to 3% in 2001-02.

External liabilities are estimated to decline to 2.8 percent of GDP in 2002-03. This ratio is based on the valuation of outstanding external liabilities at historical rates of exchange and therefore, may not give a correct picture. The ratio of outstanding liabilities, at the year and exchange rate works out to 8.7% of GDP in 2001-02. The external debt-GDP ratio based on year and exchange rates has also exhibited a declining trend over the last few years (Table 2.5).

2.23 The increasing trend in internal liabilities is a matter of serious concern. This has not only raised the interest burden, but also raised concerns about the sustainability of the growing internal debt. Net market borrowings financed 64.8% of the gross fiscal deficit in 2001-02. In the current year, this is estimated to increase 70.7%. Although in the current year, interest rates on Government Securities have softened, the interest burden of the Government may go up once interest rates start firming up. In addition to market borrowings, Government has been depending on relief bonds for meeting its deficit. The net receipts under relief bonds amounted Rs.4,500 crore in the revised estimates for 2001-02 and are budgeted to increase to Rs.6,500 crore in 2002-03 effected a reduction of 50 basis points in the interest rates on relief bonds. The Central Govt. has introduced 7% savings bonds 2002 as a tax free, non-transferable bond with 6 years maturity for subscription from October 1, 2002.