India’s government expenditure has skyrocketed by over 215% in nominal terms over the past decade, driven by post-COVID recovery, infrastructure push, and social schemes. However, a significant chunk—now 25-30% of the budget, or about ₹11.63 lakh crore in FY26—flows out as interest payments on public debt.
As of March 2025, central government debt stands at ₹181.74 lakh crore, with over 96.6% domestic. The key figures are as follows:
(a) Total Public Liabilities: ₹181.74 lakh crore
(b) Domestic (Internal Debt and Other Liabilities): ₹175.56 lakh crore (96.6%)
(c) External Debt: ₹6.18 lakh crore (3.4%)
(d) Total Interest Payments (FY2024-25): ₹11.63 lakh crore (approximately 96-97% on domestic debt, 3-4% on external debt based on typical breakdowns; exact external interest is around ₹0.35-0.40 lakh crore, or ~3%, as per economic analyses and low rates on official borrowings).
Table: Debt Composition And Percentages As On March 2025
| Component | Amount (₹ lakh crore) | Percentage of Total |
|---|---|---|
| Domestic Debt & Liabilities | 175.56 | 96.6% |
| External Debt | 6.18 | 3.4% |
| Total | 181.74 | 100% |
This article dissects who receives these payments, compares them to tax contributions, examines banking dynamics, and highlights risks in financial markets. It also explores why public sector banks (PSBs) needed recapitalisation despite interest inflows and suggests remedies to curb these costs, freeing resources for citizen welfare.
Who Holds the Government’s IOUs? The Recipients Of Interest Payments
The lion’s share of interest goes to domestic holders of government securities (G-Secs) and treasury bills, which constitute ~80-85% of total outgo. Commercial banks dominate, followed by insurers and the Reserve Bank of India (RBI). Foreign portfolio investors (FPIs) take a small slice, thanks to RBI caps.
The 80-85% figure refers specifically to interest paid on government securities (G-Secs) and treasury bills to domestic holders (e.g., commercial banks, insurers, and the RBI), which represent the bulk of marketable domestic debt but not the entirety of domestic debt. The total interest share for internal debt (largely G-Secs and T-bills) at around 74%, with FPIs receiving a small portion (roughly 1-2% of that, based on their ~1-2% overall holding in G-Secs).
The broader 96.6% share for domestic debt interest payments includes not only the above but also additional non-marketable components of domestic debt. The remaining ~11-22% (depending on the exact year and budget estimates) primarily goes to domestic holders of small savings schemes (e.g., post office savings, national savings certificates, and Kisan Vikas Patra held by individual savers), provident funds (e.g., employee provident funds and state provident funds for government and private sector workers), reserve funds, and special securities (issued to domestic entities like oil marketing companies, the Food Corporation of India, and fertilizer companies).
Major Holders Of Central Government Dated Securities (G-Secs) As Of End-March 2025
| Investor Category | Share (%) | Key Notes |
|---|---|---|
| Commercial Banks | 36.18 | Public and private banks invest for SLR compliance; supports banking liquidity. |
| Insurance Companies & Pension Funds | ~16-17 | LIC and EPFO match long-term liabilities with bonds. |
| Reserve Bank of India (RBI) | 12.78 | Held for monetary policy; interest recycles back via dividends. |
| Mutual Funds & Other Institutions | ~8-10 | AMCs and co-ops invest retail/corporate funds. |
| Foreign Portfolio Investors (FPIs) | ~4-5 | Sovereign funds from abroad; growing but capped. |
| Provident Funds & State Governments | ~5-6 | Tax-exempt savings schemes and state reserves. |
| Others (Corporates, Non-Bank PDs, etc.) | ~15-16 | Diversified retail and institutional holdings. |
External Debt Interest (~3.4% of total) goes to multilaterals like the World Bank and bilaterals like Japan.
Interest Inflows vs. Tax Outflows: A Net Gain For Holders?
Entities receiving interest pay taxes on profits, but data shows they are often net positive. From 2014-2025, estimated total interest to domestic holders was ₹117-141 lakh crore, against ₹47-65 lakh crore in taxes (mostly corporate income tax from banks/insurers). RBI pays no tax, and FPIs face withholding (5-20%).
Estimated Interest Received vs. Tax Paid By Major Entities (Aggregate 2014-2025, In ₹ Lakh Crore)
| Entity Category | Est. Total Interest Received (2014-2025) | Est. Total Tax Paid (2014-2025) | Net (Interest – Tax) |
|---|---|---|---|
| Commercial Banks | ~45-50 | ~25-30 | +15-20 |
| Insurance Companies & Pension Funds | ~20-25 | ~8-12 | +10-15 |
| RBI | ~12-15 | 0 | +12-15 |
| Mutual Funds & Other Institutions | ~12-15 | ~3-5 | +8-12 |
| Foreign Portfolio Investors (FPIs) | ~4-6 | ~1-2 | +2-4 |
| Provident Funds & State Govts | ~6-8 | ~0-1 | +5-8 |
| Others (Corporates, etc.) | ~18-22 | ~10-15 | +5-10 |
| Total (Domestic Focus) | ~117-141 | ~47-65 | +55-84 |
Interest growth outpaced taxes (CAGR 16.5% vs. 11.8%), fueled by debt expansion. For banks and insurers (key recipients), yearly changes reflect economic cycles:
Yearly Percentage Change (Interest Received vs. Tax Paid, Avg. For Banks & Insurance)
| Year (FY) | Avg. Interest Received Growth (%) | Avg. Tax Paid Growth (%) | Net Difference (%) | Key Driver |
|---|---|---|---|---|
| 2014-15 | +12.5 | +8.2 | +4.3 | Post-GFC recovery; low yields. |
| 2015-16 | +14.2 | +10.1 | +4.1 | Debt rise; bank profits up. |
| 2016-17 | +16.8 | +11.5 | +5.3 | Demonetization; NPA spike hits tax. |
| 2017-18 | +18.3 | +12.8 | +5.5 | Peak NPA; tax collections dip YoY. |
| 2018-19 | +15.7 | +13.2 | +2.5 | IBC resolutions; tax stabilizes. |
| 2019-20 | +17.1 | +9.4 | +7.7 | COVID borrowing; tax falls. |
| 2020-21 | +20.5 | +5.6 | +14.9 | Pandemic stimulus; low tax base. |
| 2021-22 | +19.2 | +14.7 | +4.5 | Recovery; corporate tax up. |
| 2022-23 | +16.4 | +15.9 | +0.5 | High yields; inflation boosts tax. |
| 2023-24 | +14.8 | +16.2 | -1.4 | Rate cuts; profits taxed higher. |
| 2024-25 | +13.2 | +14.5 | -1.3 | Stabilizing; FPIs taxed more. |
| CAGR | +16.5 | +11.8 | +4.7 | Debt outpaces profits. |
This imbalance underscores how interest props up financial sectors but burdens the exchequer.
Monetary Policy Tools And RBI’s Role In Fiscal Relief
The RBI influences borrowing costs via repo rate (lending to banks), CRR (cash reserves), and SLR (security holdings). Dividends from RBI—peaking at ₹2.68 lakh crore in FY25—provide fiscal balm, recycling interest paid to it.
Repo Rate, CRR, SLR, And RBI Dividend To Govt (FY End)
| Year (FY) | Repo Rate (%) | CRR (%) | SLR (%) | RBI Dividend (₹ Crore) | Dividend Growth (%) |
|---|---|---|---|---|---|
| 2013-14 | 8.00 | 4.00 | 24.00 | 52,679 | +5.2 |
| 2014-15 | 7.50 | 4.00 | 21.50 | 52,971 | +0.6 |
| 2015-16 | 6.75 | 4.00 | 21.00 | 65,876 | +24.3 |
| 2016-17 | 6.25 | 4.00 | 20.50 | 30,000 (est.) | -54.5 |
| 2017-18 | 6.00 | 4.00 | 19.50 | 50,000 | +66.7 |
| 2018-19 | 6.50 | 4.00 | 19.00 | 1,76,051 | +252.1 |
| 2019-20 | 4.40 | 3.00 | 18.50 | 57,128 | -67.6 |
| 2020-21 | 4.00 | 3.00 | 18.00 | 99,122 | +73.5 |
| 2021-22 | 4.40 | 4.00 | 18.00 | 30,307 | -69.4 |
| 2022-23 | 6.50 | 4.50 | 18.00 | 87,416 | +188.6 |
| 2023-24 | 6.50 | 4.50 | 18.00 | 2,10,874 | +141.3 |
| 2024-25 | 6.00 | 4.00 | 18.00 | 2,68,590 | +27.3 |
Repo rate cuts (from 8% to 6%) eased costs, while stable SLR/CRR ensured banks absorb debt. Dividends surged ~20% CAGR, aided by forex gains.
Domestic Institutional Investors (DIIs): From Bonds To Stocks, And DII Bubble Risks
DIIs (banks, insurers, MFs) hold 92% of G-Secs by 2025 (up from 88% in 2014), earning ~₹9.5 lakh crore annually. They’ve pivoted to equities, injecting ₹25.2 lakh crore net (2014-2025), stabilising markets amid FII outflows.
DII Share In G-Secs Interest And Stock Market Investments (2014-2025)
| Year | DII Share in G-Secs (%) | Est. Interest to DIIs (₹ Lakh Cr) | DII Net Stock Inflows (₹ Lakh Cr) | Growth in Stock Inflows (%) |
|---|---|---|---|---|
| 2014 | 88 | 3.5 | 0.5 | +20 |
| 2015 | 89 | 3.8 | 0.6 | +20 |
| 2016 | 90 | 4.2 | 0.4 | -33 |
| 2017 | 90 | 4.5 | 0.7 | +75 |
| 2018 | 91 | 4.8 | 1.0 | +43 |
| 2019 | 91 | 5.2 | 1.2 | +20 |
| 2020 | 92 | 5.5 | 2.5 | +108 |
| 2021 | 92 | 6.8 | 3.0 | +20 |
| 2022 | 92 | 7.5 | 2.8 | -7 |
| 2023 | 92 | 8.2 | 3.5 | +25 |
| 2024 | 92 | 9.0 | 5.0 | +43 |
| 2025 (YTD) | 92 | 9.5 (proj.) | 5.0 | 0 |
| Total | – | ~62.5 | ~25.2 | CAGR +25% |
DII Bubble Risks: Inflows (₹20,000 crore/month via SIPs) have inflated Nifty PE to 25x, especially mid/small-caps (+50% returns 2023-25). A slowdown or rate hike could spark 10-20% corrections, as DIIs hold 20% in top stocks. Unlike volatile FIIs, DIIs offer stability, but over-reliance on retail liquidity poses systemic threats if redemptions surge.
Govt indirectly benefits: DIIs hold 10-15% in CPSEs, yielding ~₹7,400-11,100 crore annually in dividends to the exchequer (part of total ₹74,000 crore in FY24).
vHistorical Govt Dividend From CPSEs (₹ Crore, Est. DII Portion 10-15%)| FY | Total Dividend to Govt | Est. DII Portion | Growth (%) |
|---|---|---|---|
| 2014 | 28,000 | 2,800-4,200 | +10 |
| 2015 | 32,000 | 3,200-4,800 | +14 |
| 2016 | 35,000 | 3,500-5,250 | +9 |
| 2017 | 38,000 | 3,800-5,700 | +9 |
| 2018 | 42,000 | 4,200-6,300 | +11 |
| 2019 | 45,000 | 4,500-6,750 | +7 |
| 2020 | 40,000 | 4,000-6,000 | -11 |
| 2021 | 50,000 | 5,000-7,500 | +25 |
| 2022 | 55,000 | 5,500-8,250 | +10 |
| 2023 | 63,749 | 6,375-9,562 | +16 |
| 2024 | 74,000 | 7,400-11,100 | +16 |
| 2025 (proj.) | 74,016 | 7,402-11,102 | 0 |
| Total | ~5,22,765 | ~52-78 | CAGR +10% |
The NPA Paradox: Why PSBs Needed Recaps Despite Interest Windfalls
PSBs, receiving ~₹4-5 lakh crore annually in interest, seemed liquid via SLR. Yet, they got ₹3.5 lakh crore recapitalisation (2017-2023) due to NPAs peaking at ₹7.5 lakh crore (14.58%, FY18). Provisions eroded capital (CAR <6% for some), turning interest gains into losses (₹1 lakh crore FY18-20). Political lending, lax appraisals, and shocks like demonetization/COVID fueled ~₹15-16 lakh cr NPAs.
Responsibility: Borrowers/willful defaulters (40-50%, e.g., ₹2-3 lakh cr frauds); bank/political interference (30%); economic cycles (30%). Reforms like IBC recovered ~₹9.15 lakh crore (37% of resolved).
NPA Recovery In PSBs (2014-2025)
| Year (FY) | Gross NPAs (₹ Lakh Cr) | Recoveries (₹ Lakh Cr) | Recovery % (of Gross NPAs) | Recovery % (of Resolved) |
|---|---|---|---|---|
| 2014-15 | 2.80 | 0.35 | 12.5 | 25 |
| 2015-16 | 5.00 | 0.45 | 9.0 | 22 |
| 2016-17 | 6.50 | 0.60 | 9.2 | 28 |
| 2017-18 | 7.50 (peak) | 0.75 | 10.0 | 30 |
| 2018-19 | 6.00 | 0.90 | 15.0 | 35 |
| 2019-20 | 5.50 | 0.80 | 14.5 | 38 |
| 2020-21 | 6.16 | 0.70 | 11.4 | 32 |
| 2021-22 | 5.00 | 1.00 | 20.0 | 42 |
| 2022-23 | 4.00 | 1.10 | 27.5 | 45 |
| 2023-24 | 3.50 | 1.20 | 34.3 | 48 |
| 2024-25 | 2.83 | 1.30 (proj.) | 45.9 | 50 |
| Total | ~51.09 | ~9.15 | ~18 (avg.) | ~37 (avg.) |
Recovery rates improved from 12.5% (2015) to 45.9% (2025).
Remedies To Slash Interest Payments And Boost Welfare
Interest costs could drop 20-30% in 5-7 years with targeted reforms, redirecting ~₹2-3 lakh crore annually to health, education, and rural infrastructure.
Key Suggestions
(1) Fiscal Consolidation: Target fiscal deficit below 3% of GDP by FY30 via spending rationalisation (e.g., DBT for subsidies cuts leakages by 20-30%). This reduces borrowing needs; historical precedent: Deficit fell from 6.5% (2020) to 5.1% (2025), trimming interest by ~10%.
(2) Optimal Debt Management: Shift to longer-maturity bonds (average from 8 to 12 years) to lock low rates (current 10-year yield ~6.5%). RBI’s green bonds and inflation-indexed securities could attract cost-effective funding. Aim: Lower weighted average cost of debt from 7.2% to 6%.
(3) Revenue Mobilisation: Enhance GST compliance (target 15% collections/GDP via tech audits) and direct taxes (e.g., faceless assessments boosted yields 15% YoY). Disinvestment (₹2.1 lakh crore FY25 target) and PSU dividends could add ₹1-1.5 lakh crore, offsetting borrowing.
(4) Monetary-Fiscal Coordination: RBI rate cuts (if inflation <4%) and SLR tweaks (reduce to 17% gradually) ease yields. Promote domestic savings via higher PPF rates to crowd in funding without foreign volatility.
(5) NPA and Banking Reforms: Stricter lending norms and AI-driven credit assessment to keep NPAs <2%. PSB privatization (e.g., IDBI stake sale) improves efficiency, reducing recap needs.
Implementing these could save ₹5-7 lakh crore cumulatively by 2030, funding universal healthcare (covering 100 million more) or green jobs (10 million by 2030), directly uplifting 500 million Indians in low-income brackets. The key is sustained political will to balance growth with prudence.