Context

  • Public debt is the total amount borrowed by the government of a country. So, why is public debt significant? Let’s take a closer look. 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.

What do you mean by Public Debt?

  • Since the Union government relies heavily on market borrowing to meet its operational and developmental expenditure, the study of public debt becomes key to understand the financial health of the government. 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. Internal debt constitutes more than 93% of the overall public debt. Also, note that 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 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

These are listed as follows:

  • 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.

Importance of 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. However, of late, there is a demand for creating a specialized agency for managing public debt as exists in some advanced economies.
  • For instance, the Niti Aayog has advocated the creation of a separate public debt management agency (PDMA).

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.

Public Debt as a percentage of GDP

  • The Union government’s liabilities account for a little over 46% of the country’s GDP. However, if the public debt is calculated as general government liabilities, which also includes the liabilities of states then it goes up to 68% of the country’s GDP.

Non Financial Debt

  • Non-financial debt consists of credit instruments issued by governmental entities, households and businesses that are not included in the financial sector.

Financial and Non-Financial Companies

  • Financial companies include commercial and investment banks, insurance companies, finance companies, mortgage lenders and investment firms.
  • Examples of non-financial companies or entities that are non-financial and, therefore issue non-financial debt are manufacturing companies, service companies, government entities and households.

E.g of Non-Financial Debt

  • Debts are contractual obligations to repay monetary loans, often with related interest expense.
  • Non-financial debt includes industrial or commercial loans, Treasury bills and credit card balances.
  • They share most of the same characteristics with financial debt, except the issuers are non-financial.
  • They have maturities ranging from one day to perpetuity, and can be used as loans to finance a company’s growth. Companies can also use more sophisticated debt instruments for hedging purposes.

Source: Financial Express