Public debt

Public debt

Subject :Economy

Section: Fiscal Policy

Context: Government’s total gross debt increased by 2.2 per cent quarter on quarter t o ₹159.53 lakh crore in April June this fiscal, a Finance Ministry report said. The liabilities stood at ₹156.08lakhcrore at March end.

Details:

• Since Apr-June (Q1) 2010-11, Public Debt Management Cell (PDMC), Budget Division, Department of Economic Affairs, Ministry of Finance has been bringing out a quarterly report on debt management on a regular basis. The current report pertains to the quarter April-June (Q1 FY24).
• During Q1 of FY24, the Central Government on issuance/settlement basis of dated securities raised gross amount worth ₹4,08,000 crore and ₹2,71,415 crore after adjusting for switches. The weighted average yield (WAY) of issuances during the quarter stood at 7.13% and it was 7.34% for Q4 FY23. The weighted average maturity (WAM) of the issuances worked out to 17.58 years for Q1 FY24 and 16.58 for Q4 FY23. The gross amount raised through 91-day, 182-day and 364-day Treasury Bills during the quarter amounted to ₹4,96,266 crore while total repayments were ₹3,07,278 crore. During April-June 2023, the cash position of the Central Government remained in surplus mostly.
• Total gross liabilities (including liabilities under the ‘Public Account’) of the Government, as per provisional data, increased marginally to ₹1,59,53,703 crore at end- June 2023 from ₹1,56,08,634 crore at end- March 2023.This represented a quarter-on-quarter increase of 2.2 per cent in Q1 FY24. Further, nearly 26.6 per cent of the outstanding dated securities had a residual maturity of less than 5 years.
• The yield on the 10-year benchmark security softened from 7.31% at the close of the quarter on March 31st , 2023 to 7.12% at the close on June 30th, 2023, thus softening by 19 bps during the quarter.
• In secondary market, trading activities were concentrated in 7–10-year maturity bucket during the quarter mainly because of more trading observed in 10-year benchmark security. Private sector banks emerged as dominant trading segment in secondary market during the quarter under review with a share of 22.59 per cent in “Buy” deals and 25.00 per cent in “Sell” deals in the total outright trading activity, followed by foreign banks, public sector banks, primary dealers, and mutual fund. On a net basis, foreign banks, insurance companies, private sector banks and primary dealers were net sellers while public sector banks, co-operative banks, FIs, mutual funds and ‘Others’ were net buyers in the secondary market.

What is Public Debt?

• 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.
  • Union government relies heavily on market borrowing to meet its operational and developmental expenditure. 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.

What are the types of Public Debt?

• 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, 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

• Over the years, the Union government has followed a considered strategy to reduce its dependence on foreign loans in its overall loan mix.
• 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 debt constitutes more than 93% of the overall public debt.
  • 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

• 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 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.

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.

What is Debt-to-GDP ratio?

• The debt-to-GDP ratio indicates how likely the country can pay off its debt. Investors often look at the debt-to-GDP metric to assess the government’s ability of finance its debt. Higher debt-to-GDP ratios have fuelled economic crises worldwide.
• The NK Singh Committee on FRBM had envisaged a debt-to-GDP ratio of 40 per cent for the central government and 20 per cent for states aiming for a total of 60 per cent general government debt-to-GDP.

Suggested measures to make public debt sustainable –

• Privatisation of loss-makingPSUs
• Prudential stance as per the Fiscal Responsibility Budget Management (FRBM) Act 2003
• Leveraging ofPublic Financial Management System (PFMS)
• PPP model in social schemes
• Investment in infrastructure
• Harmonisation of tax regime
• Thrust on renewable energy