Public Debt

Public Debt refers to the total outstanding borrowing of the Government that must be repaid in the future. It includes borrowings from both internal and external sources.

Public debt is an important instrument of fiscal policy. Governments borrow to bridge the gap between their receipts and expenditure and to finance infrastructure, developmental activities and welfare programmes.

Constitutional Provisions

1. Borrowing by the Central Government (Article 292)

• The Central Government can borrow within India or outside India upon the security of the Consolidated Fund of India.
• Parliament determines the limits on such borrowings through legislation.

2. Borrowing by State Governments (Article 293)

• State Governments are permitted to borrow only within India, upon the security of their respective Consolidated Funds.
• State Governments cannot borrow directly from foreign sources.
• A State Government with outstanding loans from the Central Government or loans guaranteed by the Central Government requires the Centre’s consent before raising further loans.

External Borrowings by State Governments

• As per the recommendations of the 12th Finance Commission, access to External Financing by the States for various projects is facilitated by the Central Government, which provides the sovereign guarantee for these borrowings.
• From April 1, 2005, all general category states borrow from multi-lateral and bilateral agencies (World Bank, ADB etc.) on a back-to-back basis viz. the interest cost and the risk emanating from currency and exchange rate fluctuations are passed on to States.
• In the case of special category states (North-Eastern States, Himachal Pradesh, Uttarakhand and J&K), external borrowings of State Governments are given by the Union Government as 90 per cent loan and 10 per cent grant.

Classification of Government Liabilities

Government liabilities are broadly classified into two categories:

• Public Debt: Borrowings contracted by the government against the Consolidated Fund of India.
• Other Liabilities: Financial obligations arising from funds received under the Public Account of India, such as small savings, provident funds and other deposits.

Central Government Total Debt/Liabilities

The total debt and liabilities of the Central Government consist of the following major components.

1. Internal Debt: It refers to borrowings raised by the Central Government within the domestic market.

• It is primarily raised through issuance of Treasury Bills and Dated Securities in the domestic market.
  • It comprises loans raised in the Open Market, Compensation and other Bonds, etc.
  • It also includes borrowings through treasury bills including treasury bills issued to State Governments, Commercial Banks and other Investors, as well as Non-Negotiable, Non-Interest Bearing Rupee Securities issued to International Financial Institutions.

2. External Debt: It refers to borrowings raised by the Central Government from foreign sources.

• It includes loans from
  • Foreign Governments (bilateral).
  • Multilateral Institutions (e.g., World Bank, ADB).
  • Rupee Debt (Foreign portfolio investment{FPI} and NRI rupee deposits)
  • FPI purchasing G-Secs

3. Public Account Liabilities:

• It includes borrowings from schemes such as:
  • Public Provident Fund (PPF)
  • Kisan Vikas Patra (KVP)

4. Off-Budget Liabilities:

• Financial obligations of government-owned entities which the Government has to repay or service from the Annual Financial Statement.
• Examples: Food subsidy dues to FCI, fertiliser bonds.

Public Debt

• Internal Debt and External Debt combined together is called Public Debt of Government of India and it is contracted against the Consolidated Fund of India.

Implications and Concerns of High Public Debt

• Debt Trap Risk: Excessive borrowing leads to increased interest payments, crowding out future development spending.
• Inflationary Pressure: Monetization of debt (borrowing from RBI) increases money supply, fueling inflation.
• Crowding Out Private Investment: High government borrowing raises interest rates and limits credit availability for private players.
• Sovereign Credit Risk: High debt-to-GDP ratio can trigger downgrades by credit rating agencies, reducing investor confidence.
• Intergenerational Inequity: Current over-borrowing shifts the repayment burden to future generations.

Benefits of Public Debt

• Promotes Growth: Used effectively, borrowed money funds infrastructure and social development.
• Counter-Cyclical Fiscal Tool: Borrowing during a slowdown supports demand and stabilizes the economy.
• Financial Inclusion: Issuance of government securities and bonds helps develop capital markets.
• Resource Mobilisation: Debt instruments help mobilise domestic and foreign savings.