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Government Borrowing or Public Debt

30th September, 2022 Economy

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  • The government has announced a reduction in its gross borrowing target for the financial year 2022-23 by Rs 10,000 crore to Rs 14.21 lakh crore.


Public Debt

  • Public debt is the total amount borrowed by the government of a country. In the Indian context, public debt includes the total liabilities of the Union government that have to be paid from the Consolidated Fund of India. Sometimes, the term is also used to refer to the overall liabilities of the central and state governments. However, the Union government clearly distinguishes its debt liabilities from those of the states. It calls overall liabilities of both the Union government and states as General Government Debt (GGD) or Consolidated General Government Debt.


Study of Public Debt

  • Since the Union government relies heavily on market borrowing to meet its operational and developmental expenditure, the study of public debt becomes key to understand the financial health of the government. The study of public debt involves the study of various factors such as debt-to-GDP ratio, and sustainability and sources of government debt. The fact that almost a fourth of the government expenditure goes into interest payment explains the magnitude of the liabilities of the Union government.


Objectives of Public Debt / Borrowing

  1. Income and Revenue: The target of public debt normally is to cover the ditch that developed in any year between proposed expenditure and expected revenue. Whenever because of increased administrative expenditure or flood, feminine, earth quake and communicable diseases like unexpected problem government's income becomes less because they have to spend it to covers these problems then government cover it by taking Indian and Foreign debts. This is the government; whose income is different from all the taxes and revenue sources.
  2. In Times of Depression: Depression is the condition when costs reduce, there is a lack of courage in people for spending money on industries and in future there is no possibility of getting gain. This condition can be removed when there is increase in the demand of things and services and that is possible when in the country there is an increase in the expenditure of public construction work or most important public use and infra-structure services.
  3. To Curb Inflation: Inflation is the name of that condition at the time of increased cost. So, government by taking debt can take back a big quantity of work power from the hands of people but modern economists believe that as comparison to government tax, taxation is said to be more important will to remove inflation, because if the debted government money is never used in productive use, it increase the responsibility for government to give it back. But waste tax - income can easily to be debited in the government fund so the pressure can be removed from production in economy.
  4. To Finance Development Plans: In undeveloped economy, there is always a lack. In these countries, as the ability to pay the bill is less. So, government cannot take shelter on heavy taxation. But to remove poverty from the country, this is also most needed and important to do arrangements of development plans. In this condition, the only way is to take public debt. So, the governments of undeveloped countries take debts from within the country or from foreign governments or from people to do finance arrangements.
  5. The Finance Public Enterprises: Government also takes debts for the arrangement of finance for the commercial enterprises running by itself.
  6. Expansion of Education and Health Services: Government can also take debt for the construction and development of education and health services and other services like this. That helps to increase normal social welfare but does not give any direct finance and that is not productive from the angle of currency.
  7. To Finance War: Government can take debt for the self-defence work. In the present century of increased international pressure and atomic war, there is a need of money in big amount to save the country from foreign attacks and for self-defence services and to do the arrangement of modern decoration. But it is very difficult to collect the money for modern wars only by taxation because it affects the production unfavourably. So, to cope up with this type of situation government can take shelter from public debt from inside and outside the country.
  8. For the Establishment of Social Society: For the establishment of socialist society, government is doing nationalism of industry and business in present time and running it themselves, but to run modern industries, there is a need of big quantity of money government can only fulfil this by taking debts.
  9. To Cover the Expenditure on Administrative Work till Getting Income: The income which government got from taxes that is available at the end of the year but expenditure is from the starting of the year so at the beginning of the year government spends money by taking debt and pays the debts when it got the income in the last of the year.
  10. To Make the Public Verdict Favourable: When the citizens are not able to pay the tax then the government have to take debt. Sometimes even then the more capability of public, the government never increase taxes because the public verdict sticks to favourable.


Internal Public Debt versus External Public Debt

  • 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

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.


Importance of 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).


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.

Public Debt as a percentage of GDP

  • Government Debt to GDP in India averaged 68.51 percent of GDP from 1980 until 2020. The Government’s liabilities account for 56.29 per cent of the country’s GDP IN 2021-22.
  • India's external debt to GDP ratio was 17.1 percent in 2006, then went upward to 23.9 percent in 2014 but subsequently has come down to 19.9 percent in 2022—same as the ratio in 2019.


Advantages and Disadvantages of the Public Debt

Advantage of Public Debt

  1. Increase in Origin in Money: - Public debts encourage industries in country, production increases, national income increases by which the life standard of citizens of the country increases.
  2. Suitable Repayment Balance: - Business and repayment balance become in favour of taking debt and the problem of foreign investment solves.
  3. Economic Development: - Undeveloped countries become capable to do their economic development by public debts.
  4. Control on Natural Calamities:- Government takes the help of public debts to control natural calamities.
  5. Successful War Conduction: - Wars have become very expensive today. Therefore, taking debt is essential for conduction of war.
  6. Harmony: - Equal and suitable distribution debts take place by which harmony and cooperation increase.
  7. Secure Investment: - Public debts are secure sources of investment and every individual considers it profitable to invest money in it.
  8. Public Works: - With the help of public debts public works and plans like building of roads, water-electricity, canals, bridges etc. can be implemented by government.
  9. Non-economic Benefits: - Friendly relations develop between countries taking and giving debts from public debts.


Disadvantages of Public Debt

  1. Misuse of Resources of Country: - Such conditions must be laid while taking public debts that the industries on which debt is used, that must have partial control on country debtor. Misuse of sources of country takes place in favour and a big part of money goes to foreign countries as interest.
  2. Fear of Government’s Bankruptcy: - If government receives debt easily then there is a fear that whether government may receive such a large amount of debt whose repayment may become impossible.
  3. Nature of Extravagancy: - When public debt begins to receive easily then there is a fear of its extravagancy.
  4. Political Burden: - Debt-giver country intervenes in the policies of debtor country for the defense of capital of their citizens and debtor country loses its political freedom.
  5. Emergency: - There is a fear of emergency like political controversy and war from public debts.
  6. Burden on Public: - When debts are taken for non-productive works then the burden of tax is increased on public for its repayment.
  7. Economic Backwardness: - Foreign debt makes the economy of the country weak and country begins to depend on other for their economic development.


According to Adam Smith, “Public debts create the conditions of war and extra expenditure”.


Final Thoughts

  • In the short run, public debt is a good way for countries to get extra funds to invest in their economic growth. When used correctly, public debt can improve the standard of living in a country. It allows the government to build new roads and bridges, improve education and job training, and provide pensions. This encourages people to spend more now instead of saving for retirement. This spending further boosts economic growth.
  • But in the long run, public debt that's too large causes investors to drive up interest rates in return for the increased risk of default. That makes the components of economic expansion, such as housing, business growth, and auto loans, more expensive. To avoid this burden, governments need to carefully find that sweet spot of public debt. It must be large enough to drive economic growth but small enough to keep interest rates low.