Public debt

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Public debt is a modern invention and was not heard prior to 18^th century. Bastable holds that in its present form the public debt is the creation of the last two centuries. The monarch used to amass treasure in peace to be used in the times of need. The practice of raising loans grew gradually.

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• Meaning

Generally public debt refers to loans raised by a govt. within the country or outside the country. Every govt. like individuals has to borrow when its expenditure exceeds its revenue. But it is not a source of revenue like taxes. Of course in wider sense, the term public revenue covers all types of income. Hence, public revenue includes the money borrowed by a govt. the amount borrowed by the govt. during any given year constitutes the income of that year. We may call therefore public debt as revenue of the govt. the loans raised or any debt incurred or received in a year constitute the income of the govt. like other taxes levied or collected in a year. But the basic difference between the public debt and other sources of revenue is that public debt has to be paid back by the govt. the other types of income are not to be paid back. The govt. collects taxes from the public without any commitment or promise. But public loans or debts are collected by the treasury or govt. from banks, institutions and individuals on the conditions given in writing that these would be repaid and interest would be paid regularly either yearly or half yearly as per terms of loans. The terms of interest on these loans have also to be selected under these conditions.

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• 1. Prof. J.K Mehta has rightly mentioned, “Public revenue, therefore, consists of the money that the govt. is not obliged to return to the very individual from whom it is obtained. Public debt on the other hand , carries with it the obligations on the part of the govt. to pay money back to the individuals from whom it has been obtained.’’
• 2. According to Prof. Findlay Shiras “ National debt is a debt which a state owes to its subject or to the nationals of other countries.’’
• 3. Prof P.E Taylor defines, “The debt is the form of promises by the treasury to pay to the holders of these promises a principal sum and in most instances interest on that principal. Borrowings is restored to in order to provide funds for financing a current deficit.”
• 4. Prof. Carl S. Shoup defines public debt or govt. borrowing as, “The receipt from the sale of financial instrument by the govt. to individuals or firms in the private sector to release manpower and real resource and to finance the purchase of those resources of to make welfare payments or subsidies

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Objectives of public debt

In the past the way of living was very simple and the borrowing was not very significant. The govt. budgets were very small. The govt. also followed the policy of non intervention in economic system. But in modern times, especially after the world depression of 1929-34, the public authorities started to take keen interest in the economic development of their respective countries. Thus, public borrowing has become sine- qua- non for the economic development of a nation. The govt. activity is expanding vastly and without public borrowing it is not possible to work on such heavy projects. In this way, it has become part and parcel of the instrument of fiscal policy for the development of under developed as well as for the developed countries. Now a day’s no matters for an extra ordinary increase in public debt as it brings to the economy the capability of repaying the debt as it is spent on productive purposes. The crucial objectives of public debt are being mentioned as below:

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• 1. For the maintenance of balance between expenditure and revenue.
• 2. Fighting depression.
• 3. To curb inflation.
• 4. Financing economic development.
• 5. To meet unprecedented expenses.
• 6. To check the cyclical fluctuation.
• 7. Unpopularity of taxation.
• 8. War finance.
• 9. To finance public enterprises.

. 10 For better allocations of resources.

. 11. Expansion of education and public health services.

12. Creation of infrastructures.

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Difference between public debt and private debt

There are similarities and dissimilarities between private and public debt. The govt. is almost in the same position as is private borrower in case of acquiring public borrowing. Public authorities borrow funds to acquire certain resources. Similarly, private individual make use of the borrowed funds to acquire certain resources. Both public and private borrowing involves diversion of funds from one type of use to another. The govt. may borrow either for consumption or for investment purposes like private borrower. The public authorities and private individuals also pay interest on these borrowings. Despite these similarities, there is much dissimilarity between these two kinds of debt. The main points of difference between private and public debt are given.

• 1. The government is sovereign and it has the power of compulsion. In the times of war or economic crises in the country, the govt. can compel the people to lend money to the govt. under these circumstances; the govt. may refuse to pay back the debt though such position never occurs. But in case of private debt, no private individuals can force or compel another private individual to lend him.
• 2. The govt. prevails for a longer time and it is possible to take loans for a longer period while a private person while a private person can borrow only for a short period of time.
• 3. The loan taken by the govt. is generally spent on productive purposes but an individual may spend the money borrowed both for productive as well as for non productive purposes.
• 4. The govt. may borrow from the sources inside the country as well as from the external sources like foreign countries. But it is very difficult to borrow from the external countries for a private individual.
• 5. The govt. generally borrows money to spend for the welfare of the society. The govt. utilizes the loans for the development schemes which have been started for the common welfare of the community. But private debt is not used for the society, and its main aim is profit earning. In other words it is done to maximize the profit.
• 6. The govt. repays its loans through taxing the people. Additional taxes are imposed on the public to repay the borrowed money. In this way, creditors have their own contribution that they have paid taxes for the repayment of loans. In other words, the burden of the public debt is shared by the public collectively. But on the other hand it is impossible for a private borrower to levy taxes. He has to repay his debt either out of his personal earning or out of his savings or by borrowing from other sources

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• 7. Rate of interest paid by the govt. is very low as compared to rate of interest paid by a private borrower. The govt. can reduce the rate of interest paid by a private borrower. The govt. can reduce the rate of interest payable on public loan but for a private borrower it is not possible. He has to pay the rate of interest which he has promised to pay at the time of borrowing.
• 8. The public debt makes its effect on the production and distribution of wealth and income in the country. But the loan taken by a private person makes no such effect because of being a small amount.
• 9. The credit of govt. is very high and it is possible for it to borrow the amount at cheaper rates. But the it is not possible for the private person as the govt. is more trust worthy than private individual.
• 10. The govt. can repudiate the payment of loan taken by it from the public in some critical conditions but for a private individual, it is very difficult to refuse payment of loans under any circumstances. The state however, normally takes this first step in very rare circumstances because such an act will greatly damage the reputation of the govt.

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Sources of public borrowings

• (A) Internal sources.
• 1. Borrowings from individuals.
• 2. Borrowing from non- financial institutions.
• 3. Borrowing from commercial banks.
• 4. Borrowing from the central govt.
• (B) External sources
• Govt. may borrow from other countries, apart from borrowings from individuals and financial institutions within the country the borrowings can be used to finance war expenditure or to buy defense equipment or to pay for the development projects or to pay off adverse balance of payments. In the past, floating of loans for any specific projects like railway of dam construction was taken up by the individual, banking and other financial institutions.

 � Classification of public debt�

• 1. Internal and external debt.
• 2. Productive and irredeemable debt.
• 3. Redeemable and irredeemable debt.
• 4. Short term and long term debt.
• 5. Funded and unfunded debt.
• 6. Voluntary and compulsory debt.
• 7. Marketable and non marketable debt.
• 8. Gross and net debt.

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Effects of public debt

• 1. Effects of consumption. 
• 2. Effects on investment.
• 3. Effects on production
• 4. Effects on distribution.
• 5. Effects on national income.
• 6. Effect on resource allocation.
• 7. Effect on liquidity.
• 8. Effect on private sector.
• 9. Effect on the working of the money market.
• 10. Effect of external debt.

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Dangers of public debt �

• 1. Extravagance. 
• 2. Loans for unproductive purposes.
• 3. It hampers the economic development of a country.
• 4. Adverse effects on production and distribution.
• 5. Challenge to the political freedom.
• 6. Flow of national wealth.

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Redemption of public debt

• (A) REDEMPTION OF INTERNAL DEBT
• Repudiation of debt.
• Conversion of loans.
• Utilization of budgetary surplus.
• Terminal annuity.
• Refunding.
• Compulsory reduction in rate of interest.
• Additional provision of
• Sinking fund.

. Capital levy.

(B) REDEMPTION OF EXTERNAL DEBT

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Growth of India’s public debt

• Year (end- march) (RS CRORE)
• 1986-87 1990-91 2017-18
• 1. Internal debt 86312 154004 6424917
• Of which
• Market loans 40832 70520 5062881
• Treasury bills 19876 6953 2144203
• 182/364-day treasury bills 0.0 1,078 227842
• 2. Small savings, deposits 30230 61771 978966
• And provident funds
• 3. Other accounts 14698 45336 360046
• 4. Reserve funds and deposits 15006 21922 225614
• External debt 36578 66314 410526
• Public debt 122890 220318 6835443
• (Internal +external debt)
• Internal liabilities 146247 283033 7799545
• (1+2+3+4)
• Total liabilities 182825 349347 8400071
• (Internal liabilities+ external debt)
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• �Source: RBI handbook of statistics on Indian economy 2016-17(Mumbai, 2017), table 119, p 187
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DEBT OBLIGATIONS OF THE STATE GOVERNMENTS�

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• Year (end- march) (RS CRORE)
• 1985-86 1990-91 2017-18
• 1. Internal debt (a to e) 8,049 19,274 30,64,982
• A. market loans 6,104 15,652 22,01,051
• b.compensation and
• other bonds 41 60 2,23,801
• C. ways and means
• Advances from RBI 286 1,050 1,006
• D. loans from banks and
• Other financial institutions 1,618 2,513 1,62,719
• E. special securities
• Issued to NSSF - - 4,76,404
• 2. Loans and advances from
• the central govt. 38,786 73,521 1,65,220
• 3. Provident funds etc. 6,825 16,861 1,65,220
• Of which:
• State provident funds 5,743 14,002 3,58,706
• 4. Reserve funds 2,036 4,734 82,257
• 5. Deposits and advances 5,244 12,769 3,19.118
• 6. Contingency funds 415 995 4,501
• 7. Total liabilities (1 to 6) 61,355 1,28,155 40,22,082
• Source: RBI handbook of statistics on Indian economy 2017-18 (Mumbai, 2018), table 114, p 179

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