Central Government Debt of India: Understanding the Growing Debt Burden, Its Causes, Economic Impact and the Road Ahead

Central Government Debt of India: Understanding the Growing Debt Burden, Its Causes, Economic Impact and the Road Ahead

An in-depth analysis of India’s government borrowings, outstanding liabilities, interest payments, fiscal deficit, debt-to-GDP ratio, public expenditure and long-term financial sustainability.

The debt of the Indian government is one of the most important indicators of the country’s economic and financial health. Every year, the Central Government collects revenue through income tax, corporate tax, Goods and Services Tax (GST), customs duties, dividends, fees and other sources. However, its expenditure on infrastructure, defence, education, healthcare, subsidies, social welfare, salaries, pensions, interest payments and development programmes frequently exceeds its available revenue.

To bridge this gap, the government borrows money.

Borrowing is not necessarily a sign of economic weakness. Governments across the world borrow to finance infrastructure, manage economic crises, support public services and maintain economic stability. However, the size of outstanding debt, the cost of borrowing, the government’s capacity to repay and the productive use of borrowed money determine whether government debt remains sustainable.

India’s Central Government has accumulated substantial liabilities over several decades. These liabilities have increased because of development requirements, persistent fiscal deficits, economic shocks, the COVID-19 pandemic, infrastructure investment and rising public expenditure.

The issue is therefore not simply how much money the government owes. A more important question is whether India’s economy, tax revenues and future growth can support its existing debt obligations without placing excessive pressure on public finances.

According to the Union Budget 2026–27, the outstanding internal and external debt and other liabilities of the Central Government are estimated at approximately ₹214.82 lakh crore at the end of March 2027. Including adjustments for exchange rates, extra-budgetary resources and cash balances, the government’s broader debt measure is estimated at approximately ₹218.63 lakh crore.

These figures make Central Government debt an important subject for understanding India’s economic direction, fiscal priorities and long-term financial sustainability.

1. What Is Central Government Debt?

Central Government debt refers to the total outstanding financial obligations of the Government of India arising from money borrowed or liabilities accumulated to finance its activities.

Whenever government expenditure exceeds the revenue and non-debt capital receipts available to it, the government generally finances the difference through borrowing.

For example, suppose the government collects ₹30 lakh crore in revenue and other non-debt receipts but spends ₹40 lakh crore during a financial year. The difference of ₹10 lakh crore represents the financing requirement that must be met through borrowing, drawing down cash balances or other financing arrangements.

The accumulated borrowing over multiple years contributes to the government’s outstanding debt.

Central Government debt includes several categories:

• Internal debt raised within India.

• External debt borrowed from foreign governments and international institutions.

• Treasury bills and government securities.

• Liabilities arising from small savings schemes.

• Provident fund-related liabilities.

• Certain other public account liabilities.

• Other recognised financial obligations.

It is important to understand that Central Government debt is different from the total debt of India.

India’s overall public-sector and general government debt includes the liabilities of the Central Government, State Governments and, depending on the measurement, certain other public-sector entities.

Therefore, when discussing India’s debt, the distinction between Central Government debt and general government debt must always be maintained.

2. How Much Debt Does the Indian Central Government Have?

India’s Central Government debt has increased considerably over the past two decades.

According to information presented by the Ministry of Finance in Parliament, the Central Government’s total outstanding debt, including internal debt, external debt and other liabilities, increased from approximately ₹21.25 lakh crore in 2004–05 to ₹185.95 lakh crore in 2024–25 under the relevant historical debt series.

The increase reflects the expansion of the Indian economy, growing government responsibilities, successive fiscal deficits and extraordinary borrowing requirements during economic disruptions.

The following figures illustrate the long-term increase.

The 2025–26 figure is a revised estimate, rather than a final audited outturn.

For 2026–27, the Union Budget estimates outstanding internal and external debt and other liabilities at ₹214.82 lakh crore at historical exchange rates. A broader adjusted measure, including external debt at current exchange rates and other specified adjustments, is estimated at ₹218.63 lakh crore.

These figures should not be mixed indiscriminately because different government publications use different accounting definitions and exchange-rate treatments.

Nevertheless, the broad trend is clear: the nominal value of Central Government liabilities has increased substantially over time.

3. Understanding the Components of Central Government Debt

Central Government debt is not a single borrowing account. It consists of different financial instruments and liabilities with different characteristics.

Understanding these components is essential to assessing India’s financial position.

A. Internal Debt

Internal debt represents money borrowed by the Central Government from sources within India.

It is the largest component of government borrowing.

The government raises internal debt through several instruments, including:

Government securities: These are financial instruments issued by the government to borrow money from investors. Banks, insurance companies, mutual funds, financial institutions and other investors purchase these securities.

Treasury bills: These are short-term government borrowing instruments, generally issued for maturities of 91 days, 182 days and 364 days.

Special securities: The government also issues securities for specific financial arrangements, including certain compensation and other liabilities.

Market loans: These are borrowings raised through the domestic financial market.

Internal borrowing allows the government to mobilise domestic savings and finance expenditure without relying excessively on foreign lenders.

It also creates an important connection between government finances and India’s banking and financial system.

B. External Debt

External debt represents the government’s borrowing from foreign sources.

These borrowings can include loans from:

• Multilateral institutions.

• International development agencies.

• Foreign governments.

• Other recognised international lending institutions.

India’s Central Government external debt is relatively small compared with its internal debt.

According to the Union Budget 2026–27, external debt at historical exchange rates is estimated at approximately ₹7.11 lakh crore at the end of March 2027.

External borrowing can provide access to long-term development financing. However, it introduces currency-related risks.

If the Indian rupee depreciates against the currency in which a loan is denominated, the rupee value of the outstanding liability and the cost of repayment can increase.

C. Public Account Liabilities

Not all government liabilities arise from conventional market borrowing.

The government also manages certain funds and deposits through the Public Account of India.

These include:

• Small savings schemes.

• Provident funds.

• Deposits.

• Certain reserve funds.

• Other specified government liabilities.

For example, when citizens invest money in eligible government-backed small savings instruments, the government receives funds and assumes corresponding repayment obligations.

These liabilities form part of the broader financial obligations of the government.

D. Other Liabilities and Extra-Budgetary Resources

Certain financial obligations arise through special borrowing arrangements and other government-supported mechanisms.

Extra-budgetary resources have historically been used to finance certain public-sector and infrastructure-related activities outside conventional budgetary borrowing.

Their treatment in official debt statistics has evolved. Consequently, comparisons across different years should account for changes in accounting coverage and definitions.

A complete assessment of government debt must consider both conventional borrowing and other recognised liabilities.

4. Central Government Debt as a Percentage of GDP

The absolute amount of government debt does not tell the complete story.

A country with a large economy may be able to manage a higher level of debt than a country with a much smaller economy. This is why economists frequently use the debt-to-GDP ratio to assess the relative size of government debt.

GDP, or Gross Domestic Product, represents the total value of goods and services produced within a country during a particular period.

The debt-to-GDP ratio compares outstanding government debt with the annual economic output of the country.

The formula is:

Debt-to-GDP Ratio = (Outstanding Government Debt ÷ Annual GDP) × 100

For example, if a government has outstanding debt of ₹200 lakh crore and the country’s annual GDP is ₹350 lakh crore, the debt-to-GDP ratio is approximately 57.14%.

This means the outstanding debt is equivalent to approximately 57.14% of one year’s economic output.

It does not mean that the government must repay the entire debt within one year. Government borrowing is generally spread across different maturities, and existing securities are often refinanced when they mature.

India’s Central Government debt-to-GDP position

According to the debt series presented in Parliament, India’s Central Government debt-to-GDP ratio was approximately:

These historical figures follow the debt-to-GDP series reported in the parliamentary response. Other government publications may show different ratios because of changes in GDP estimates, accounting coverage and the treatment of liabilities.

The COVID-19 pandemic caused a substantial increase in India’s debt ratio.

The government had to increase expenditure to support healthcare, vulnerable households, businesses and economic recovery at a time when economic activity and government revenues were under pressure.

As economic activity recovered and fiscal consolidation resumed, the ratio moderated from its pandemic-era level.

The Union Budget 2026–27 and the associated RBI analysis indicate a further reduction in the Central Government debt ratio, with a budgeted figure of approximately 55.6% of GDP.

However, the debt ratio remains sensitive to economic growth, inflation, borrowing requirements and revisions to GDP estimates.

5. Why Has India’s Government Debt Increased?

There is no single reason behind the increase in India’s Central Government debt. It is the result of several economic, fiscal and structural factors.

A. Persistent Fiscal Deficits

The most important reason for the accumulation of government debt is the fiscal deficit.

A fiscal deficit occurs when the government’s total expenditure exceeds its non-borrowed receipts.

For example:

• Government expenditure: ₹50 lakh crore.

• Revenue and non-debt capital receipts: ₹35 lakh crore.

• Fiscal deficit: ₹15 lakh crore.

The government must arrange financing for this gap.

Borrowing is the principal source of financing, although cash balances and other financing adjustments also influence the final borrowing requirement.

When a government consistently records fiscal deficits, its outstanding liabilities generally increase.

India has experienced fiscal deficits for decades because public expenditure has frequently exceeded the revenue available to finance it.

B. The COVID-19 Pandemic

The COVID-19 pandemic was one of the most significant events affecting India’s public finances in recent history.

During 2020–21, economic activity was disrupted by lockdowns, supply-chain interruptions, reduced consumption and business closures.

Government revenues faced pressure while expenditure requirements increased.

The government had to finance additional healthcare expenditure, food assistance, rural employment support, economic relief measures and other interventions.

The Central Government’s fiscal deficit reached approximately 9.2% of GDP in 2020–21.

This exceptional deficit increased borrowing requirements and contributed to the sharp rise in government debt.

Although the pandemic was an extraordinary economic shock, its fiscal consequences continued to influence government finances in subsequent years.

C. Infrastructure Development

India requires substantial investment in infrastructure to support economic growth.

Major infrastructure requirements include:

• National highways and expressways.

• Railways and railway modernisation.

• Airports and ports.

• Electricity generation and transmission.

• Urban transport systems.

• Water supply and sanitation.

• Digital infrastructure.

• Industrial corridors and logistics networks.

These projects require substantial financial resources.

Government borrowing can help finance infrastructure that may generate economic benefits over several decades.

For example, a highway can reduce transportation costs, improve connectivity, support industrial development and encourage commercial activity.

Similarly, railway investment can improve logistics efficiency and strengthen the movement of goods and passengers.

However, infrastructure borrowing produces the expected economic benefits only when projects are properly selected, completed efficiently and supported by adequate demand.

D. Defence Expenditure and National Security

India has significant defence and national security requirements.

The government must finance military salaries, pensions, equipment, weapons systems, aircraft, naval vessels, border infrastructure, research and technological modernisation.

Defence expenditure is an essential responsibility of the Central Government.

However, military modernisation and long-term defence commitments require substantial financial resources.

These expenditure requirements compete with other budgetary priorities and influence the overall fiscal position.

E. Subsidies and Social Welfare Programmes

The Central Government finances numerous welfare and support programmes.

These include food subsidies, fertiliser subsidies, cooking fuel support, rural employment programmes, social protection initiatives and other development schemes.

Such programmes can support vulnerable households, improve living conditions and reduce economic hardship.

However, they also create recurring expenditure obligations.

When subsidy requirements increase because of international commodity prices, inflation, weather disruptions or other economic conditions, the government’s expenditure can rise considerably.

If additional expenditure is not matched by additional revenue or spending adjustments, borrowing requirements may increase.

F. Interest Payments on Existing Debt

Government debt creates another expenditure obligation: interest payments.

Whenever the government borrows money, it generally agrees to pay interest to lenders.

As the outstanding debt stock increases, the amount of interest payable can also rise.

Interest payments are particularly important because they are largely committed expenditure. The government cannot simply stop making contractual interest payments without serious financial consequences.

Consequently, a growing debt stock can create pressure on future budgets even when the government is not undertaking new development programmes.

G. Economic Slowdowns and Revenue Shortfalls

Government revenue depends significantly on economic activity.

When businesses expand, employment increases, consumption grows and profits improve, tax collections can strengthen.

However, during an economic slowdown, corporate profits, consumption, investment and taxable income may weaken.

This can reduce government revenue at precisely the time when economic support may be needed.

Consequently, economic downturns can widen fiscal deficits and increase government borrowing.

H. Rising Government Responsibilities

As India’s population, economy and public infrastructure expand, the responsibilities of the Central Government also increase.

The government must respond to changing requirements in healthcare, education, transportation, energy, technology, environmental protection and social security.

These responsibilities require sustained public expenditure.

The challenge is to finance these priorities while maintaining a manageable debt burden.

6. Fiscal Deficit: The Connection Between Borrowing and Government Debt

The fiscal deficit is one of the most important concepts in understanding Central Government debt.

It measures the gap between total government expenditure and total receipts excluding borrowings.

A simplified formula is:

Fiscal Deficit = Total Expenditure − Total Non-Borrowed Receipts

The fiscal deficit represents the government’s financing requirement before accounting for the full range of financing adjustments.

When the government runs a fiscal deficit, it generally needs to borrow money to finance the shortfall.

Therefore, the fiscal deficit is a major contributor to the increase in outstanding government debt.

India’s fiscal deficit trend

India’s fiscal deficit increased significantly during the pandemic and subsequently declined as the government pursued fiscal consolidation.

The following figures are based on the Union Budget and RBI’s presentation of fiscal indicators.

The reduction in the fiscal deficit indicates that the government is attempting to reduce the gap between expenditure and non-borrowed receipts.

However, a lower fiscal deficit does not necessarily mean that outstanding government debt is declining in absolute terms.

As long as the government continues to run a fiscal deficit, it generally continues to add to its debt stock.

The distinction is important: reducing the rate at which debt accumulates is different from actually reducing the total amount of debt outstanding.

7. Interest Payments: How Much Does the Government Spend on Its Debt?

Interest payments are among the largest expenditure commitments in the Union Budget.

They represent the cost of servicing the government’s accumulated borrowing.

The government must allocate a significant portion of its annual revenue to paying interest on outstanding debt.

According to the Union Budget 2026–27, interest payments are budgeted at approximately ₹14.04 lakh crore.

This is a substantial amount of public money.

To understand its significance, consider the following budget figures:

Interest payments represent approximately 26.3% of total budgeted expenditure.

They also amount to approximately 39.7% of budgeted revenue receipts.

These ratios demonstrate the importance of debt servicing in government finances.

Why are interest payments a concern?

Money spent on interest payments is not directly available for constructing new hospitals, expanding schools, improving railway infrastructure or financing additional development programmes.

However, interest payments are not necessarily wasted expenditure. They are contractual obligations arising from previous borrowing, and that borrowing may have financed infrastructure, public services, welfare programmes or economic stabilisation.

The concern is the opportunity cost.

When a large proportion of government revenue is committed to interest payments, the government has less flexibility to allocate additional resources to other priorities.

This can become particularly difficult during economic downturns or emergencies.

8. Where Does the Central Government Borrow Money From?

The Central Government obtains funds through different domestic and international channels.

Understanding these sources helps explain how government borrowing operates in practice.

A. Commercial Banks

Banks are major participants in the market for government securities.

They purchase government bonds and treasury bills as part of their investment and liquidity-management activities.

Government securities are also important instruments within India’s banking and financial system.

B. Insurance Companies

Insurance companies receive premiums from policyholders and invest a portion of their funds in financial instruments.

Government securities are important investments because they provide predictable interest payments and are generally considered to have low credit risk in domestic currency.

C. Mutual Funds

Debt mutual funds and other investment vehicles may invest in government securities.

Through these investments, individual and institutional investors can obtain indirect exposure to government borrowing.

D. Reserve Bank of India

The Reserve Bank of India manages government borrowing operations and acts as the government’s banker and debt manager.

It conducts government securities auctions and manages various aspects of the public debt market.

The RBI also plays an important role in monetary policy, liquidity management and financial stability.

Its role in managing government borrowing should be distinguished from the government’s fiscal decision-making.

E. Small Savings Investors

Citizens invest in government-supported savings instruments such as eligible postal savings schemes, Public Provident Fund and National Savings Certificates.

These schemes mobilise domestic savings and contribute to the government’s broader financing structure.

F. International Financial Institutions

The government also receives external loans from international institutions and development agencies.

Such financing may support infrastructure, development initiatives and other eligible programmes.

However, India’s government debt is predominantly domestically financed.

This domestic orientation reduces direct dependence on foreign currency borrowing, although it does not eliminate all financial risks.

9. Is India’s Central Government Debt Dangerous?

The size of government debt alone cannot determine whether a country’s financial position is safe or unsafe.

A meaningful assessment requires consideration of several factors:

1. The debt-to-GDP ratio.

2. The government’s interest payment burden.

3. The average maturity of government debt.

4. The currency composition of borrowing.

5. The country’s economic growth rate.

6. The government’s capacity to collect taxes.

7. The availability of domestic savings.

8. The productivity of expenditure financed through borrowing.

9. The stability of financial markets.

10. The government’s ability to maintain investor confidence.

India has several characteristics that influence its debt sustainability.

First, a large proportion of Central Government borrowing is raised domestically and denominated in Indian rupees.

Second, India has a large domestic financial system that provides an important investor base for government securities.

Third, the Indian economy has significant long-term growth potential, which can support government revenue and improve the debt-to-GDP ratio.

However, India also faces challenges.

Interest payments consume a considerable share of revenue. Large infrastructure and welfare requirements create competing expenditure demands. State Government liabilities also need to be considered when assessing the country’s overall public debt position.

The International Monetary Fund’s assessment of India examines general government debt, rather than only Central Government debt. This distinction is essential because the combined liabilities of the Central and State Governments provide a broader picture of India’s public finances.

The appropriate conclusion is that India’s debt position must be assessed through its repayment capacity, fiscal discipline and long-term economic performance rather than through the headline borrowing figure alone.

10. Central Government Debt vs Total Government Debt of India

One of the most common misunderstandings in discussions about India’s debt is the failure to distinguish between Central Government debt and general government debt.

These are two different measurements.

Central Government debt

This includes the outstanding liabilities of the Union Government of India.

It covers borrowings and other liabilities arising from the Central Government’s financial activities.

State Government debt

Individual states also borrow money to finance their expenditure.

State Governments spend on:

• Roads and state highways.

• Electricity and water infrastructure.

• Public healthcare.

• Government schools and universities.

• State-level welfare programmes.

• Salaries and pensions.

• Agricultural support.

• Urban development.

These activities are financed through state revenues, transfers from the Central Government and state-level borrowing.

General government debt

General government debt combines the liabilities of the Central Government and State Governments under a consolidated accounting framework.

It provides a more comprehensive picture of India’s public-sector fiscal position.

According to the IMF’s November 2025 assessment, India’s general government debt was projected at approximately 81.1% of GDP for 2025–26.

This is considerably higher than the Central Government’s debt ratio because it includes the broader government sector.

It is therefore incorrect to compare a Central Government debt figure directly with an international general government debt estimate without considering their different definitions and coverage.

11. How Does Government Debt Affect Ordinary Citizens?

Government debt is not merely an accounting issue for the Ministry of Finance. It can affect households, businesses, investors and taxpayers in several ways.

Its impact can be direct or indirect.

A. Future Taxation

Government debt creates future repayment and interest obligations.

The government generally meets these obligations through revenue collection, refinancing and other financial arrangements.

Taxation is an important source of government revenue.

If debt servicing requirements become increasingly expensive, the government may face pressure to increase revenue through higher taxes, broader tax coverage or improved tax compliance.

This does not mean that every increase in government debt automatically results in higher taxes.

However, debt can influence future taxation decisions.

B. Pressure on Development Expenditure

When interest payments consume a large portion of government revenue, fewer resources remain available for additional public expenditure.

For example, money that could potentially be allocated to healthcare, education, research or infrastructure may instead be committed to servicing previous borrowing.

This creates a long-term budgetary trade-off.

C. Impact on Interest Rates

Government borrowing influences India’s financial markets.

When the government raises substantial amounts of money from domestic investors, it competes for financial resources with businesses and other borrowers.

Depending on liquidity conditions, monetary policy, investor demand and economic expectations, substantial government borrowing can contribute to upward pressure on market interest rates.

Higher borrowing costs can affect:

• Home loans.

• Business loans.

• Vehicle loans.

• Corporate financing.

• Infrastructure investment.

However, government borrowing does not automatically cause higher interest rates. RBI monetary policy, inflation expectations, banking liquidity and global financial conditions also play important roles.

D. Impact on Inflation

Government borrowing can influence inflation depending on how the borrowed money is spent and how the borrowing is financed.

If borrowing supports productive infrastructure, it may expand the economy’s productive capacity over time.

However, if additional expenditure increases demand faster than the economy’s ability to produce goods and services, it can contribute to inflationary pressure.

The relationship between government borrowing and inflation is therefore complex.

E. Impact on Employment

Government borrowing can support employment when funds are used for infrastructure construction, public investment and development programmes.

Roads, railways, ports, electricity projects and urban infrastructure generate direct employment and can create additional employment through economic activity.

On the other hand, an excessive interest burden can constrain future development spending.

The employment impact ultimately depends on the quality, timing and productivity of government expenditure.

F. Impact on Future Generations

Government debt creates obligations that may continue for several decades.

Future taxpayers and governments must manage the financial commitments created by previous borrowing.

However, future generations may also benefit from the assets created through that borrowing.

For example, a railway network, highway, power project or water infrastructure facility can provide economic benefits long after the original borrowing was undertaken.

The important question is whether future generations inherit productive assets and a stronger economy alongside the debt obligations.

12. Does Government Borrowing Always Harm the Economy?

No. Borrowing can be an important instrument of economic development.

Governments cannot always finance large infrastructure projects entirely through current tax revenue.

If the government waits until it has collected sufficient revenue to finance every major project, important infrastructure investment may be delayed.

Borrowing allows the government to undertake long-term investment and distribute its financing costs over time.

For example, consider a major expressway project.

The government may borrow money to finance construction. The project may take several years to complete, but it can provide benefits for decades through improved connectivity, reduced travel time, lower logistics costs and increased commercial activity.

Similarly, investment in railway infrastructure can improve the movement of passengers and freight, while electricity infrastructure can support industrial development.

In such cases, borrowing may contribute to long-term economic growth.

However, the quality of expenditure matters.

Borrowing used for productive investment can potentially strengthen the economy’s future capacity to generate income.

Borrowing used primarily to finance recurring expenditure may not create equivalent long-term assets or additional revenue-generating capacity.

This distinction is central to responsible fiscal management.

13. Government Debt and Capital Expenditure: Why the Quality of Borrowing Matters

Capital expenditure refers to spending that creates or improves long-term assets.

Examples include:

• Construction of highways.

• Railway infrastructure.

• Airports.

• Power plants.

• Irrigation projects.

• Public buildings.

• Water supply systems.

• Urban transport networks.

Revenue expenditure, in contrast, generally covers recurring government expenses such as salaries, pensions, subsidies, administrative expenses and interest payments.

The distinction is important because capital expenditure can create assets that support future economic activity.

According to the Union Budget 2026–27, the Central Government has budgeted approximately ₹12.22 lakh crore for capital expenditure.

This represents a substantial public investment commitment.

The government has also placed emphasis on effective capital expenditure, which includes grants to other levels of government for the creation of capital assets.

The economic argument behind infrastructure-led public investment is that better infrastructure can increase productivity, improve competitiveness, attract private investment and expand the tax base.

However, capital expenditure must be evaluated on its actual results.

A project that is delayed, poorly designed, underutilised or significantly more expensive than expected may not generate sufficient economic benefits to justify its financing cost.

Therefore, the amount borrowed is only one part of the analysis. The economic return generated by the borrowed funds is equally important.

14. India’s Fiscal Consolidation Strategy

Fiscal consolidation means gradually improving the government’s fiscal position by reducing excessive deficits and stabilising public debt.

India has pursued fiscal consolidation following the extraordinary borrowing requirements created by the COVID-19 pandemic.

The government’s approach has included:

Reducing the fiscal deficit: The government has gradually lowered the fiscal deficit as a percentage of GDP.

Improving tax collection: Expanding tax compliance and strengthening revenue administration can improve government receipts.

Maintaining capital expenditure: Infrastructure investment is being maintained while the government works towards reducing the fiscal deficit.

Managing expenditure: The government seeks to improve the allocation and efficiency of public spending.

Increasing economic growth: Higher economic growth can increase tax revenues and improve the relationship between debt and GDP.

Improving debt management: A well-managed borrowing programme can reduce refinancing risks and improve the maturity structure of outstanding debt.

The debt-to-GDP target

India’s fiscal policy has increasingly focused on the debt-to-GDP ratio as a medium-term fiscal anchor.

The Union Budget 2026–27 projects Central Government debt at approximately 55.6% of GDP.

The broader objective is to place public debt on a declining and sustainable path while maintaining sufficient fiscal space for development.

It is important to distinguish between a fiscal target and an achieved outcome. Budget estimates are projections and may change as actual revenues, expenditure and GDP evolve.

15. The Role of the Reserve Bank of India in Government Debt Management

The Reserve Bank of India plays a major role in India’s government securities market.

It acts as the government’s debt manager and conducts borrowing operations on behalf of the Central Government.

Its responsibilities include:

• Conducting government securities auctions.

• Managing the government’s borrowing programme.

• Facilitating the development of the government securities market.

• Managing liquidity in the financial system.

• Supporting orderly functioning of the debt market.

• Providing relevant information and analysis on public debt.

Government securities are important for the entire financial system.

They serve as investment instruments for banks, insurance companies, pension funds and other institutions.

They also provide reference yields for pricing other financial assets.

The RBI’s monetary policy decisions can influence government borrowing costs because interest rates, liquidity and inflation expectations affect demand for government securities.

However, fiscal policy decisions, including how much the government spends and borrows, are primarily the responsibility of the Central Government.

The distinction between fiscal policy and monetary policy is important for understanding how India’s financial system operates.

16. Major Risks Associated With India’s Central Government Debt

Although domestic borrowing provides several advantages, India’s government debt is exposed to various risks.

A. Interest Rate Risk

If market interest rates rise, newly issued government securities may carry higher borrowing costs.

Existing fixed-rate securities generally retain their contractual interest rates, but refinancing maturing debt at higher rates can increase the government’s future interest burden.

B. Refinancing Risk

Government securities mature at different intervals.

When a large volume of securities approaches maturity, the government must arrange funds for repayment.

It can use available revenues, cash balances or new borrowing.

If financial markets experience instability or investor demand weakens, refinancing can become more expensive or difficult.

C. Currency Risk

External debt creates exposure to changes in foreign exchange rates.

If the rupee depreciates, the domestic-currency value of foreign-currency liabilities can increase.

This is one reason why the currency composition of government debt matters.

D. Low Economic Growth

A slowdown in GDP growth can make the debt burden more difficult to manage.

When the economy grows slowly, tax revenues may increase more gradually while outstanding debt continues to generate interest obligations.

A prolonged slowdown can therefore weaken fiscal sustainability.

E. Global Economic Shocks

International financial crises, geopolitical conflicts, energy price fluctuations and disruptions in global trade can affect India’s economy.

For example, higher international crude oil prices can increase import costs and create pressure on inflation, subsidies and government finances.

F. Demographic and Social Spending Pressures

India’s future expenditure requirements will evolve as its population, employment structure and social needs change.

Healthcare, education, pensions, urban infrastructure and social protection may require increasing public resources.

These commitments must be incorporated into long-term fiscal planning.

G. Contingent Liabilities

Government guarantees and certain other financial commitments can create potential future obligations.

These liabilities do not always become actual government debt.

However, if a guaranteed entity faces financial difficulties and the government must honour its guarantee, public finances may come under pressure.

A comprehensive assessment of fiscal risks must therefore examine both existing liabilities and potential future obligations.

17. What Happens If India’s Government Debt Continues to Increase?

An increasing debt stock is not automatically a sign of financial distress.

The critical issue is whether debt increases faster than the economy’s ability to support it.

Suppose the government borrows additional money every year, but the economy also expands rapidly.

In that situation, the debt-to-GDP ratio may remain stable or even decline despite an increase in the absolute amount of debt.

However, if government borrowing increases substantially while economic growth remains weak, the debt ratio can rise.

Over time, this can create several challenges.

First, interest payments may consume an increasing share of revenue.

Second, the government may have less flexibility to respond to unexpected economic shocks.

Third, higher borrowing costs may affect private investment.

Fourth, financial markets may demand higher yields if investors perceive an increase in fiscal risk.

Finally, future governments may face difficult decisions involving taxation, expenditure priorities and borrowing.

The challenge is therefore not to eliminate all government borrowing but to maintain borrowing at a level that the economy can sustainably support.

18. What Should India Do to Manage Its Growing Government Debt?

Managing government debt requires a balanced approach.

The government must continue investing in economic development while ensuring that borrowing does not create an unsustainable financial burden.

Several measures can strengthen India’s long-term debt position.

A. Increase Government Revenue

Improving tax collection is essential for reducing dependence on borrowing.

The government can strengthen revenue through:

• Improving tax compliance.

• Reducing tax evasion.

• Expanding the formal economy.

• Simplifying tax administration.

• Improving GST compliance.

• Strengthening direct tax collection.

• Increasing the efficiency of government-owned assets.

A growing economy with a stronger tax base can finance more public expenditure through its own revenue.

B. Prioritise Productive Capital Expenditure

Borrowed money should be directed towards projects that improve economic productivity.

Infrastructure investment, technological development, energy security, transportation and logistics can contribute to long-term economic growth.

The government should also strengthen project monitoring to minimise cost overruns, delays and inefficient spending.

C. Control Unproductive Expenditure

Government expenditure should be regularly evaluated to determine whether programmes are achieving their intended objectives.

This does not mean eliminating essential welfare programmes.

Rather, it means improving targeting, reducing administrative inefficiencies and ensuring that public resources reach their intended beneficiaries.

D. Reduce the Interest Burden Over Time

The government should focus on improving debt management, maintaining a balanced maturity structure and reducing refinancing risks.

A stronger fiscal position can also improve investor confidence and potentially reduce future borrowing costs.

E. Maintain Fiscal Discipline

Fiscal consolidation should remain an important medium-term objective.

The government should avoid allowing temporary revenue gains to become permanent expenditure commitments without adequate financing.

At the same time, excessive fiscal tightening during an economic slowdown can weaken demand and investment.

Fiscal policy therefore needs to balance economic stability with debt sustainability.

F. Encourage Private Investment

Private investment can complement public infrastructure expenditure.

When businesses invest in manufacturing, technology, energy, transportation and services, they contribute to employment, production and tax revenue.

A stronger private investment environment can reduce the pressure on the government to finance every major development project through public borrowing.

G. Strengthen Transparency in Public Finances

A clear and comprehensive understanding of government liabilities is essential.

Public financial reporting should provide information about:

• Outstanding government debt.

• Interest payment obligations.

• Government guarantees.

• Extra-budgetary borrowings.

• Public Account liabilities.

• Debt maturity profiles.

• Potential fiscal risks.

Greater transparency allows Parliament, investors, economists and citizens to evaluate government finances more effectively.

19. India’s Government Debt: What Do the Latest Budget Figures Tell Us?

The Union Budget 2026–27 provides an important picture of India’s current fiscal position.

The following figures summarise the major budgetary indicators.

These figures reveal several important aspects of India’s financial position.

First, the government’s outstanding liabilities are substantial and continue to increase in nominal terms.

Second, fiscal consolidation remains an important policy objective, as reflected in the projected fiscal deficit of 4.3% of GDP.

Third, interest payments remain a significant budgetary commitment.

Fourth, the government continues to allocate substantial resources to capital expenditure, indicating that infrastructure development remains an important component of its fiscal strategy.

Finally, the debt-to-GDP ratio provides a more meaningful measure of the relative debt burden than the absolute amount of borrowing alone.

The figures should be interpreted as budget estimates and projections, not as final audited outcomes for 2026–27.

20. The Future of India’s Central Government Debt

The future direction of India’s Central Government debt will depend on the relationship between economic growth, government revenue, public expenditure and borrowing costs.

India has considerable development requirements.

The country needs continued investment in infrastructure, manufacturing, technology, defence, education, healthcare, renewable energy and urban development.

These priorities will require substantial financial resources.

At the same time, the government must manage its existing liabilities and avoid allowing interest payments to restrict future development expenditure.

Economic growth will play a particularly important role.

If nominal GDP expands at a healthy rate and government revenue grows alongside it, the debt-to-GDP ratio can gradually decline even if the nominal debt stock continues to increase.

However, if economic growth weakens, tax collections fall or borrowing costs rise significantly, managing the existing debt burden could become more difficult.

Another important consideration is the quality of government expenditure.

Borrowing that finances productive infrastructure, human capital and economic capacity can generate benefits for future generations.

By contrast, persistent borrowing to finance expenditure that does not generate equivalent long-term economic benefits can create repayment obligations without sufficiently strengthening the economy.

India’s long-term fiscal sustainability will therefore depend not only on how much the government borrows but also on how effectively it uses borrowed resources.

India’s Growing Debt and the Importance of Fiscal Sustainability

Central Government debt is an essential part of India’s economic and financial structure.

The Indian government borrows money to finance infrastructure, defence, public services, welfare programmes, economic development and other national priorities.

Over the years, these borrowing requirements have resulted in a substantial accumulation of outstanding liabilities.

The increase in government debt from approximately ₹21.25 lakh crore in 2004–05 to a budget-estimated ₹214.82 lakh crore by March 2027 illustrates the scale of the change in India’s public finances.

However, the increase in nominal debt should not be examined in isolation.

India’s economy has also expanded considerably over this period. Therefore, understanding the debt-to-GDP ratio, fiscal deficit, interest payments and economic growth is essential for evaluating the country’s financial position.

The COVID-19 pandemic demonstrated how extraordinary economic disruptions can increase government borrowing requirements. The subsequent reduction in the fiscal deficit reflects the government’s effort to restore fiscal discipline while maintaining development expenditure.

Nevertheless, interest payments remain a major financial commitment, and the government must continue balancing debt servicing with the need for investment in infrastructure, healthcare, education and other public priorities.

The most important objective for India should be to ensure that government borrowing supports sustainable economic development.

A growing economy, stronger tax revenues, efficient public expenditure, productive infrastructure investment and responsible debt management can collectively improve the country’s ability to manage its financial obligations.

The success of India’s debt management strategy will not be determined simply by whether the total amount of government debt increases or decreases.

It will depend on whether the country can grow its economy, improve public services, create productive assets, maintain investor confidence and meet its financial obligations without placing excessive pressure on future generations.

Government debt becomes economically meaningful when the resources raised through borrowing contribute to building a stronger, more productive and financially sustainable nation.