Public Borrowing

April 1, 2022
Posted by: OptimizeIAS Team
Category: DPN Topics

Public Borrowing

Subject: Economy

Section: Fiscal policy

The Centre, finalised its borrowing programme for the first half of FY23, pegging the target at ₹8.45 lakh crore for this period. With this the borrowing plan for the first half of FY23 coming is at about 60 per cent of the overall borrowing target of ₹14.95-lakh crore for FY23,

The borrowing plan, is finalised by the Government in consultation with the Reserve Bank of India (RBI)

Concept:

Borrowing is a loan taken by the government and falls under capital receipts in the Budget document. Usually, the Government borrows through the issue of government securities called G-secs and Treasury Bills.

Composition-

A. Public Debt (A1+A2)

A1. Internal Debt (a+b)

Marketable Securities
Non-marketable Securities

A2. External Debt

B. Public Account – Other Liabilities

C. Extra-Budgetary Resources (EBRs)

D. Total Liabilities (A+B+C)

Total liabilities of the Central Government include debt contracted against the Consolidated Fund of India, technically defined as Public Debt, as well as liabilities in the Public Account. These liabilities include external debt (end-of-the financial year) at current exchange rate but exclude part of NSSF liabilities to the extent of States’ borrowings from the NSSF and investments in public agencies out of the NSSF, which do not finance the Central Government deficit.

Public Debt accounted for 89.9 per cent of total liabilities, while Public Account Liabilities, which include National Small Savings Fund, State Provident Funds, Reserve Funds and Deposits and other Accounts, constituted the remaining 10.1 per cent

% of Debt to GDP ratio

Public Borrowing

Factors making the public debt portfolio stable and also sustainable.

low reliance on external borrowing and issuance of majority of securities at fixed coupon.
external borrowing from official sources which are of long term and concessional in nature.
low issuance of short-term bonds with a view to elongate the maturity profile.
Issuance of dated securities is planned and conducted, keeping in view the debt management objective of keeping the cost of debt low, while assuming prudent levels of risk and promoting market development
A vibrant secondary market provides opportunity to the investors to balance their portfolio as desired and at the same time diversify public debt.

What are off-budget borrowings?

According the budget document, “Extra budgetary resources (EBRs) are those financial liabilities that are raised by Public Sector Undertakings for which repayment of entire principal and interest is done from Government budget,” Such borrowings are made by state-owned firms to fund government schemes but are not part of the official budget calculations. Thus, Off-budget borrowings are loans that are taken not by the Centre directly, but by another public institution which borrows on the directions of the central government.

Such borrowings are used to fulfill the government’s expenditure needs.

But since the liability of the loan is not formally on the Centre, the loan is not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.

Public debt instruments:

Usually, the Government borrows through the issue of government securities called G-secs and Treasury Bills.

Treasury bills (T-bills)-Treasury bills or T-bills are issued only by the central government of India. They are short-term money market instruments, which means that their maturity period is less than 1 year. Treasury bills are currently issued with three different maturity periods: 91 days, 182 days, and 364 days.

The Treasury bill is commonly known as zero coupon securities as issued at a discount and are redeemed at face value on the date of maturity.

Cash Management Bills (CMBs) -CMBs are also zero-coupon securities and are very similar to Treasury bills. However, the maturity period is the one major point of difference between the two types of government securities. Cash Management Bills (CMBs) are issued for maturity periods less than 91 days, making them an ultra-short-term investment option. CMBs are strategically used by the government of India to meet any temporary cash flow requirements.
Dated G-Secs-Dated G-Secs are also among the different types of government securities in India. Unlike T-bills and CMBs, G-Secs are long-term money market instruments that offer a wide range of tenures, starting from 5 years and going all the way up to 40 years. These instruments come with either a fixed or a floating interest rate, also known as the coupon rate. The coupon rate is applied on the face value of your investment and is paid to you on a half-yearly basis as interest. There are around 9 different types of dated G-Secs currently issued by the government of India. These are listed below.
- Fixed-Rate Bonds
- Floating Rate Bonds
- Capital Indexed Bonds
- Inflation-Indexed Bonds
- Bonds with Call/Put Options
- Special Securities
- STRIPS
- Sovereign Gold Bonds
- 75% Savings (Taxable) Bonds, 2018
State Development Loans (SDLs)-As the name implies, SDLs are issued only by the state governments of India to fund their activities and to satisfy their budgetary needs. These types of government securities are very similar to dated G-Secs. They support the same repayment methods and come with a wide range of investment tenures. The only difference between dated G-Secs and SDLs is that the former is issued only by the central government, while the latter is issued solely by the state governments of India.