GOVERNMENT DEBT

The aggregate borro­wings by the Union Government comprising the public debt and other borrowings (small savings,provident funds,res­erve funds and deposits)  are generally known as ‘net liabilities of the Government’ or Government Debt.

Public Debt is defined as debt contracted against the Consolidated Fund of India whereas liabilities in
the Public Account is called as Other Liabilities (other borrowings).

The Centre’s total debt as a percentage of GDP was 46.5% in 2017-18. Out of this Public Debt was 41% of GDP, while other liabilities were 5.5% of GDP.

Why the Government borrows?

The State generally borrows to meet three kinds of expenditure:
(a) to meet budget deficit,
(b) to meet the expenses of war and other extraordinary situations and
(c) to finance development activity.

Public debt

Public debt is further classified into internal (38.2% of GDP) and external debt (2.9% of GDP). Internal debt consists of marketable debt (32.9% of GDP) and nonmarketable debt (5.3% of GDP) .  Government dated securities and Treasury Bills, issued through auctions, together comprises marketable debt.
Intermediate Treasury Bills issued to State Governments and select Central Banks, special securities issued to National Small Savings Fund (NSSF), securities issued to international financial institutions, etc., are part of nonmarketable internal debt.

Impact of  external debt

When a country borrows money from other countries (or foreigners) an external debt is created. It owes its all to others. When a country borrows money from others it has to pay interest on such debt along with the principal. This payment is to be made in foreign exchange (or in gold). If the debtor nation does not have sufficient stock of foreign exchange (accumulated in the past) it will be forced to export its goods to the creditor nation. To be able to export goods a debtor nation has to generate sufficient exportable surplus by curtailing its domestic consumption.

Thus an external debt reduces society’s consumption possibilities since it involves a net subtraction from the resources available to people in the debtor nation to meet their current consumption needs. In the 1990s, many developing countries such as Poland, Brazil, and Mexico faced severe economic hardships after incurring large external debt. They were forced to curtail domestic consumption to be able to generate export surplus (i.e., export more than they imported) in order to service their external debts, i.e., to pay the interest and principal on their past borrowings.

Impact of  internal debt

There is no doubt a feeling among some people that interest payment on the national debt repayment is a drain on the nation’s limited economic resources. It is pure waste of our resources to use them to pay interest on the debt.

This argument is wrong because interest payment on the debt — if domestically held —do not prevent a use of economic resources at all. It is, of course, true that if our debt is held by foreigners, we will suffer a loss of resources.

In the case of domestically held (internal) debt, internal payment on the debt involves a transfer of income from Indian taxpayers to Indian bondholders of the same generation. Since, in most cases, taxpayers and bond­holders are different entities, a large national debt inevitably involves income redistri­bution effects. But internal debt does not involve any using up of the nation’s real economic resources.