Government borrowing and crowding out
How the Government borrows and repays, who lends to it, and when its borrowing can squeeze other borrowers
Budget 2026-27; borrowing calendar of 25 September 2026; RBI bond-ownership data as on 31 March 2026
Verified 16 October 2026
For training and education only. Not investment advice.
Trainer notes
Ask the room how they think the Government will ever repay lakhs of crores of debt. Most imagine a big repayment from taxes some day. This deck shows how repayment actually works, and when government borrowing can raise interest rates or reduce credit for companies. It follows on from the deck 'Fiscal deficit and the Budget'.
The Government repays maturing bonds mostly by selling new ones, and usually borrows more on top.
So the questions that matter are whether its debt grows slower than the economy, how much revenue goes on interest, and whether its borrowing crowds out other borrowers.
Trainer notes
This is the same rollover that a company with a long-term loan book does. In 2026-27 the Budget plans to sell ₹17.20 lakh crore of bonds; ₹11.73 lakh crore of that is new debt and the rest replaces bonds that fall due. Source: FRBM Statements, Feb 2026, para 46.
Four terms to know first
Gross borrowing
The total value of new bonds sold in a year. Budgeted at ₹17.20 lakh crore for 2026-27.
Net borrowing
Gross borrowing minus bonds repaid or bought back. Budgeted at ₹11.73 lakh crore for 2026-27.
Rollover
Repaying a maturing bond with money from a new one. Here about ₹5.47 lakh crore: 17.20 − 11.73.
Debt-to-GDP
Debt as a share of the economy's yearly output. Centre: 55.6% estimated for 2026-27.
Sources: Statements of Fiscal Policy under the FRBM Act, Feb 2026, paras 31, 33, 46; Budget Speech 2026-27, paras 92-93. Borrowing figures are for dated securities.
Trainer notes
Dated securities are government bonds with a fixed maturity, usually called G-secs. The ₹5.47 lakh crore is our subtraction of the two Budget figures; it covers bonds falling due and any bought back early. The Government also borrows through Treasury bills and small savings, which are not in these two numbers.
Why the debt ratio can fall as debt rises
THE SET-UP (ASSUMED)
An imaginary government owes ₹60. Its economy produces ₹100 a year, so debt-to-GDP is 60%.
Next year it borrows ₹4 more, and GDP grows 10% in rupee terms.
- Debt rises from ₹60 to 60 + 4 = ₹64.
- GDP rises from ₹100 to 100 × 1.10 = ₹110.
- New ratio: 64 ÷ 110 = 58.18%. The debt grew, yet the ratio fell from 60%.
- If GDP grew only 5%: 64 ÷ 105 = 60.95%. The same borrowing now raises the ratio.
Result: The debt ratio falls when debt grows more slowly than the economy in rupee terms.
Illustration with assumed, round figures. Not a forecast.
Trainer notes
Here debt grew 6.67% (4 ÷ 60). With rupee GDP growth of 10% the ratio falls; with 5% it rises. Rupee, or nominal, GDP growth is roughly real growth plus inflation. For comparison, the 2026-27 Budget assumes nominal GDP of ₹393,00,393 crore, 10% above the 2025-26 Advance Estimate. Source: Budget at a Glance 2026-27, note (i).
How the Government services its debt
Revenue pays the interest
Interest is ₹14.04 lakh crore in 2026-27 (BE), 39.7% of revenue receipts. In 2025-26 (RE) it was 38.1%.
New bonds repay old ones
Maturing bonds are mostly repaid from new borrowing, so gross borrowing covers repayments plus the year's new debt.
Switches push dates out
Bonds due soon are swapped for longer ones. After ₹1.14 lakh crore of switches, 2026-27 gross borrowing fell from ₹17.20 to ₹15.99 lakh crore.
Buybacks smooth humps
In 2025-26 the Government bought back ₹86,775 crore of bonds that were due in 2026-27.
A deficit adds to debt
A fiscal deficit is financed by borrowing, so it adds to debt in rupees. The 2026-27 Budget has a fiscal deficit of 4.3% of GDP.
Sources: Budget at a Glance 2026-27; FRBM Statements, Feb 2026, paras 46-49; Finance Ministry statement of 25 Sep 2026, as reported by PTI (switches, revised gross borrowing).
Trainer notes
The percentages are our division of Budget figures: 14,03,972 ÷ 35,33,150 and 12,74,338 ÷ 33,42,323, in ₹ crore. PTI, citing finance ministry sources, reports net borrowing kept at Budget levels, so switches change repayment timing, not the year's new debt. The Budget Speech says a declining debt ratio will free up resources by reducing interest outgo.
Who lends to the Government
| % held | |
|---|---|
| Banks | 33.0 |
| Insurers | 25.6 |
| RBI | 17.6 |
| PF/pension | 9.1 |
| FPIs | 3.0 |
| MFs | 1.6 |
| Others | 10.2 |
Read the chart
- Total held: ₹125.67 lakh crore of central government dated securities.
- Banks and insurers hold 58.6%. PF: provident funds. FPIs: foreign portfolio investors.
- RBI's share rose from 12.78% to 17.59% in the year to March 2026.
- Mutual funds (MFs) hold 1.60% of these bonds but 16.75% of Treasury bills.
Source: RBI Bulletin, August 2026, Table 47, 'Ownership Pattern of Central and State Governments Securities' (end-March 2026).
Trainer notes
Dated securities here include special securities and Sovereign Gold Bonds. Provident and pension funds is our sum of 4.50% and 4.62%. All others combines co-operative banks, standalone primary dealers, financial institutions, corporates, State Governments and other holders. These lenders are the same pool that companies borrow from, which is why crowding out is possible at all.
Crowding out: the mechanism
The steps describe how it can happen. They are not a forecast for any year.
The Government borrows more
It sells more bonds to the same lenders that companies use: banks, insurers, pension and provident funds.
Lending capacity is limited
Savings available to lend in a year are finite. More government bonds take a larger share of them.
Yields can rise
To sell more bonds, the Government may have to offer a higher yield. Company loan and bond rates often price off it.
Private borrowing shrinks
Some firms borrow less or postpone projects. Economists call this crowding out.
Trainer notes
Company bonds are usually priced as a spread over government bond yields, which is how a rise in the Government's cost of borrowing can pass to companies. Yields also respond to inflation, RBI's policy rate and operations, global yields and foreign flows, so a larger borrowing programme alone does not tell you where yields will go.
What the evidence says, and the limits
Evidence from India
An RBI working paper (2022) found that as government borrowing rises and banks hold more government bonds, a crowding-out channel operates.
RBI can soften it
The paper found RBI's market operations can mitigate the effect to an extent, and that it is lower for banks with better asset quality and capital.
Crowding in
Public spending on roads, ports and power can raise returns on private projects and draw private investment in. Economists call this crowding in.
Take-away: Working paper views are the authors', not necessarily RBI's.
Source: RBI Press Release 2022-2023/493, 7 Jul 2022, on RBI Working Paper 09/2022, 'Banks' Credit and Investment Dynamics: Assessing Portfolio Rebalancing and Crowding-out'.
Trainer notes
RBI's market operations include buying government bonds in the market, which adds cash to the banking system; RBI's share of central government bonds was 17.59% at end-March 2026. Crowding in is a standard idea in economics; whether it outweighs crowding out depends on the project and the state of the economy.
Where things stand
Budget plans, RBI's borrowing calendar and RBI's holding of government bonds, as published.
- NET BORROWING (BE)
- 11.73₹ lakh crore through dated securities, 2026-27 Budget Estimate.
- OCT-MAR AUCTIONS
- 7.86₹ lakh crore over 23 weekly auctions, Oct 2026–Mar 2027.
- INTEREST / REVENUE
- 39.7%Share of 2026-27 revenue receipts going on interest (BE).
- 10-YEAR G-SEC YIELD
- 6.96%6.94% GS 2036, on 1 September 2026.
Sources: FRBM Statements, Feb 2026, para 46; RBI press release on the issuance calendar for Oct 2026-Mar 2027, 25 Sep 2026; Budget at a Glance 2026-27; RBI Bulletin, Aug 2026, Table 47.
Trainer notes
The calendar can be modified by RBI in consultation with the Government. Five per cent of each auction is reserved for non-competitive bids from specified retail investors. We do not predict borrowing, yields or rates.
If you learnt this from older material
What older decks say
- Debt is repaid mainly from taxes and sales of public sector companies.
- The rule: deficit at 3% of GDP, central debt at 40% of GDP by March 2025.
- Crowding out is explained only as theory.
What holds now
- Repayment is mostly rollover. Switches and buybacks reshape when bonds fall due.
- Central debt: 55.6% of GDP estimated for 2026-27. The aim is 50±1% by 2030-31.
- A 2022 RBI working paper found evidence of crowding out in Indian bank data.
Take-away: Debt targets and borrowing plans change with each Budget. Check the year before you quote one.
Sources: FRBM Statements, Feb 2026 (FRBM Act targets; switches and buybacks); Budget Speech 2026-27, paras 92-93; RBI Press Release 2022-2023/493.
Trainer notes
The FRBM Act's original targets were a fiscal deficit of 3% of GDP by 31 March 2021 and central government debt of 40% of GDP by 31 March 2025. Budget 2025-26 moved the anchor to central debt of 50±1% of GDP by 2030-31, with the fiscal deficit as one of the main operating tools.
Four things people get wrong
Misconception'The Government never repays its debt.'
What is trueBonds are repaid when they mature. The money mostly comes from selling new bonds, which is called rollover.
Misconception'More debt means a higher debt ratio.'
What is trueNot if the economy grows faster in rupee terms. Central debt is estimated at 55.6% of GDP for 2026-27, against 56.1% for 2025-26.
Misconception'Gross and net borrowing are the same.'
What is trueGross includes money raised to repay old bonds. For 2026-27, gross is budgeted at ₹17.20 lakh crore and net at ₹11.73 lakh crore.
Misconception'Any borrowing crowds out business.'
What is trueThe effect varies. An RBI working paper found RBI's operations and healthier banks reduce it. Public capex can also crowd in.
Trainer notes
On the fourth point, keep it balanced. Crowding out is real and can matter, but its size depends on conditions; we do not say whether the current programme is too large or too small.
Check yourself
Question 1: A government sells ₹900 crore of bonds this year, and ₹300 crore of old bonds mature (assumed figures). What is its net borrowing?
Answer: 900 − 300 = ₹600 crore. That is the rise in its bond debt for the year.Question 2: Debt is ₹80 and GDP ₹200. The government adds ₹6 of debt and GDP grows 8% in rupee terms (assumed). What happens to debt-to-GDP?
Answer: Before: 80 ÷ 200 = 40%. After: 86 ÷ 216 = 39.81%. The ratio falls, because debt grew 7.5% and GDP 8%.Question 3: Name two things that can reduce crowding out.
Answer: Any two of: RBI market operations such as bond purchases; banks with better asset quality and capital; public spending that draws private investment in (crowding in); weak private demand for loans, leaving spare savings.
Sources and disclaimer
Sources for the figures in this explainer
- Gross and net borrowing, switches, buybacks, FRBM Act targets: Statements of Fiscal Policy under the FRBM Act, Ministry of Finance, Feb 2026, paras 31 and 46-49.
- Interest, revenue receipts, fiscal deficit, GDP assumption: Budget at a Glance 2026-27, 1 Feb 2026. Debt ratio and aim: Budget Speech 2026-27, paras 92-93.
- H2 2026-27 issuance calendar (₹7.86 lakh crore): RBI press release, 25 Sep 2026. Revised gross borrowing and switches: Finance Ministry statement, 25 Sep 2026, as reported by PTI.
- Ownership of government securities, end-March 2026: RBI Bulletin, August 2026, Table 47.
- Crowding-out evidence: RBI Press Release 2022-2023/493, 7 Jul 2022 (Working Paper 09/2022; views of the authors).
- Treasury-bill ownership (mutual funds 16.75%, end-March 2026): RBI Bulletin, August 2026, Table 47.
This material is for training and investor education only. It is not investment, tax or legal advice and is not a recommendation to buy, sell or hold any security or scheme. Examples use assumed figures unless a source and date are shown. Mutual fund investments are subject to market risks; read all scheme related documents carefully. Trustner Asset Services Pvt. Ltd. is an AMFI-registered Mutual Fund Distributor (ARN-286886).