Public Debt

Public Debt

Subject – Economy

Context – In its recent research report, Morgan Stanley forecasted that India will be included in global bond indices in early 2022 and this will result in investment inflow of $170-250 billion into the Indian sovereign bond market during the next decade

Concept –

• Before Independence, the borrowing needs of Indian princely states were largely met by indigenous bankers and financiers. The concept of borrowing from the public was pioneered by the East India Company to finance the Anglo-French wars during the 18th century.
• The First World War saw a rise in India’s public debt due to the country’s contribution to the British exchequer.
• The provinces of British India were allowed to float loans for the first time in 1920 when the local government borrowing rules were issued under the Government of India Act, 1919.
• India’s public debt (combined liabilities of the Central and State governments) to gross domestic product (GDP), at constant prices, increased to a record high of 100.86 per cent in 2020 as against 76.86 per cent in 2014, as per the data from the Reserve Bank of India.
• Now, India has become the most indebted nation after Brazil and Argentina among the emerging market economies. In South Asia too, India is the most indebted after Bhutanand Sri Lanka.
• It is well-recognised that excessive public debt leads to higher risk premium in interest rates, which results in reduction of private investment (crowding out effect) as well as contraction of GDP in the long run.
  • Though an increase in public debt will stimulate aggregate demand and output in the short-run, the economic growth will turn negative in the long run if the debt-GDP ratio exceeds 90 per cent (Reinhart, Reinhart, & Rogoff, 2015).

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

To know about Debt and Fiscal consolidation, please click here.