Economics 2021
Assignment
Shreyash Raj
A039
PUBLIC DEBT IN INDIA
INTRODUCTION
The public debt is how much a country owes to lenders outside of itself. These can include
individuals, businesses, and even other governments. The term "public debt" is often used
interchangeably with the term sovereign debt. Public debt usually only refers to national debt.
Regardless of what it's called, public debt is the accumulation of annual budget deficits. It's the
result of years of government leaders spending more than they take in via tax revenues. A
nation’s deficit affects its debt and vice-versa. In 1951, Indian general (Centre plus State) debt
was approximately 18.5% of GDP. Till 1972, general debt rose steadily to about 39%, and then
fell sharply to 26% in 1975. It then stayed roughly constant as a percentage of GDP till the mid–
1990s averaging 32% between 1975–1996.1 After 1996, general debt exploded reaching 57% in
2005, a rise of 26% points in nine years. Debt GDP in India then fell to about 50% in 2011 and
then rose to 57% in 2018. The same can be seen in Figure 1:
Figure 1: General Government Public Debt-GDP
What are the types of Public Debt in India?
The Union government broadly classifies its liabilities into two broad categories. The debt
contracted against the Consolidated Fund of India is defined as public debt and includes all other
funds received outside Consolidated Fund of India under Article 266 (2) of the Constitution,
Economics 2021
Assignment
Shreyash Raj
A039
where the government merely acts as a banker or custodian. The second type of liabilities is
called public account.
Internal Public Debt versus External Public Debt in India
Over the years, the Union government has followed a considered strategy to reduce its
dependence on foreign loans in its overall loan mix. Internal debt constitutes more than 93% of
the overall public debt. Also, note that external loans are not market loans. They have been
raised from institutional creditors at concessional rates. Most of these external loans are fixed-
rate loans, free from interest rate or currency volatility.
Internal loans that make up for the bulk of public debt are further divided into two broad
categories – marketable and non-marketable debt.
Dated government securities (G-Secs) and treasury bills (T-bills) are issued through auctions and
fall in the category of marketable debt. Intermediate treasury bills (with a maturity period of 14
days) issued to state governments and public sector banks, special securities issued to National
Small Savings Fund (NSSF) are classified as non-marketable debt.
Sources of Public Debt in India
These are listed as follows:
• Dated government securities or G-secs.
• Treasury Bills or T-bills
• External Assistance
• Short term borrowings
• Public Debt definition by Union Government
The Union government describes those of its liabilities as public debt, which are contracted
against the Consolidated Fund of India. This is as per Article 292 of the Constitution.
Public Debt versus Private Debt
Public Debt is the money owed by the Union government, while private debt comprises of all the
loans raised by private companies, corporate sector and individuals such as home loans, auto
loans, personal loans.
Economics 2021
Assignment
Shreyash Raj
A039
In India Public Debt as a percentage of GDP
The Union government’s liabilities account for a little over 46% of the country’s GDP. However,
if the public debt is calculated as general government liabilities, which also includes the
liabilities of states then it goes up to 68% of the country’s GDP.
Problems Caused by Public Debts in India
(1) Distorting effects on incentives due to extra tax burden,
(2) Diversion of society’s limited capital from the productive private sector to unproductive
capital sector, and
(3) Showing the rate of growth of the economy.
Public Debt Management in India
As per Reserve Bank of India Act of 1934, the Reserve Bank is both the banker and public debt
manager for the Union government. The RBI handles all the money, remittances, foreign
exchange and banking transactions on behalf of the Government. The Union government also
deposits its cash balance with the RBI. However, of late, there is a demand for creating a
specialized agency for managing public debt as exists in some advanced economies. For
instance, the Niti Aayog has advocated the creation of a separate public debt management
agency (PDMA).
Analysis
In emerging high growth economies such as India, the government is required to propel growth
through sufficient fund allocation in infrastructure and other essential resources
IMF’s January 2021 Fiscal Monitor Update revealed that global public debt has risen to 98 per
cent of GDP (higher by 14 percentage points from the same report, October 2019), primarily due
to additional spending, forgone revenue and liquidity support. Comparing among group
countries, the ratio for advanced, emerging and middle income, and low-income developing
countries are respectively, 123 per cent, 63.3 per cent and 48.5 per cent of their GDP as against
pre pandemic levels of 105.2 per cent, 54.2 per cent and 43 per cent.
Economics 2021
Assignment
Shreyash Raj
A039
CONCLUSION
India's debt to GDP ratio increased from 74 per cent to 90 per cent during the COVID-19
pandemic, the International Monetary Fund has said, noting that it expects this to drop down to
80 per cent as a result of the country's economic recovery.
Thus, this simple analysis shows that even in an unfavorable economic environment, the
government can ameliorate the debt situation by keeping the deficit levels in check and returning
to the positive surplus levels as soon as possible. In a more comprehensive analysis, we have to
emphasize on the fact that it is the joint behavior of monetary and fiscal policies that determines
inflation and stabilizes debt in the much more complex real economy.
There is no doubt a feeling among some people that interest payment on the national debt
repayment is a drain on the nation’s limited economic resources. It is pure waste of our resources
to use them to pay interest on the debt. This argument is wrong because interest payment on the
debt — if domestically held —do not prevent a use of economic resources at all. It is, of course,
true that if our debt is held by foreigners, we will suffer a loss of resources. In the case of
domestically held (internal) debt, internal payment on the debt involves a transfer of income
from Indian taxpayers to Indian bondholders of the same generation. Since, in most cases,
taxpayers and bondholders are different entities, a large national debt inevitably involves income
redistribution effects. But internal debt does not involve any using up of the nation’s real
economic resource.
REFERENCES:
• FINANCIAL TIMES
• THE HINDU
• MONEY CONTROL
• BUSINESS STANDARD
• INVESTOPEDIA
• ECONOMIC TIMES
