Interest bill crosses ₹14 lakh cr Why India spends 20% of its budget on interest payments, more than health & education

Interest payments have emerged as the single largest expense item in India’s budget, exceeding spending on key sectors such as defence, rural development, education and health, highlighting the growing cost of servicing government debt even as the economy continues to expand.

Data from the Union Budget shows that the government will spend about ₹14.04 lakh crore on interest payments, making it the biggest component of total expenditure. This is significantly higher than allocations for pensions (₹2.96 lakh crore), rural development (₹2.73 lakh crore), home affairs (₹2.55 lakh crore) and education (₹1.39 lakh crore), according to budget data compiled by Rupeetool.

The scale of the interest burden means that nearly one-fifth of the government’s total expenditure goes toward servicing past borrowings, a level that is higher than many major economies.

Explaining the trend, Kanan Bahl, Founder of Fingrowth Media, said that India spends about 20% of its total expenses on interest payments primarily because the government needs to borrow regularly to meet its obligations.

“The government has to borrow money to fund defence, pensions, development projects and welfare schemes. In Budget 2026, the government itself said that it will need to borrow to fund around 24% of its revenue requirement in FY27,” Bahl said.

Unlike households, governments typically operate with deficits, meaning they spend more than they earn in revenue and make up the difference through borrowing. Over time, this leads to a large stock of outstanding debt, which in turn requires regular interest payments.

Debt trap

In personal finance, such a situation might be seen as a debt trap, but economists say the comparison is not entirely accurate when applied to sovereign governments.

Countries across the world run fiscal deficits and carry high levels of debt relative to their economies. According to international estimates, the debt-to-GDP ratio of the United States is about 125%, Japan over 220%, China around 90%, Germany about 65%, and India around 81%.

This means India’s overall debt level is not unusually high compared with other major economies. However, what makes India’s interest burden stand out is the relatively higher interest rate at which the government borrows.

Because borrowing costs in India are higher than in advanced economies, the share of interest payments in total spending is also higher. Estimates show that interest payments account for about 20% of government expenditure in India, compared with roughly 12.9% in the United States, around 4–5% in China, about 1–2% in Germany, and low single digits in Japan.

The large interest outgo limits the government’s fiscal flexibility, as money spent on debt servicing cannot be used for infrastructure, welfare or growth-oriented investments.

Budget data illustrates this contrast clearly. While interest payments alone exceed ₹14 lakh crore, combined spending on major sectors such as health, urban development, IT and telecom, tax administration and finance together remains far lower.

Economists note that as long as economic growth remains strong and borrowing is used for productive spending, high interest payments do not necessarily signal a crisis. However, they also warn that keeping borrowing costs under control and gradually reducing the fiscal deficit will be important to ensure that interest payments do not crowd out development spending in the future.