Debt

Budgetary deficits must be financed by taxation, borrowing or printing money.Governments have mostly relied on borrowing, giving rise to what is called government debt.The concepts of deficits and debt are closely related. Deficits can be thought of as a flow which adds to the stock of debt. If the government continues to borrow year after year, it leads to the accumulation of debt and the government has to pay more and more by way of interest. These interest payments themselves contribute to the debt.

Public Debt

• Public Debt includes internal debt comprising borrowings inside the country like market loans; borrowing from the RBI on the basis of treasury bills; and external debt comprising loans from foreign countries, international financial institutions, etc.
• Public debt is justified as the government does not have adequate resources and taxation cannot be done beyond a point. It should be for productive reasons and also welfare reasons. The spiral of deficit and debt run the risk of undermining the country’s creditworthiness, devaluing the currency and destabilizing the entire economy with grave social consequences.

External Debt

External debt includes:

• Long-term external debt which is the bulk part
• NRI deposits and multilateral loans
• Commercial borrowings
• Bilateral loans and
• Negligible amount from export credit.

External debt-to-GDP ratio has been on the decline since 1991. Government has been able to check the external debt through measures like raising funds from least expensive sources, accelerating growth in export, prepaying high-cost debts, maintaining vigil on build up of short-term debt and encouraging foreign direct investments.

Internal Debt

Internal debt includes loans raised by the government in the open market through treasury bills and government securities, special securities issued to the RBI, rupee securities (non-interest bearing) issued to international institutions such as the IMF and the World Bank and, most importantly, various bonds like the oil bonds, fertilizer bonds etc.

The money sucked in by the Market Stabilization Scheme (MSS) is also shown in the government’s statement of liabilities. Introduced in April 2004, the scheme envisages the issue of treasury bills and/or dated securities to absorb excess liquidity arising out of the excessive foreign exchange inflows.

Other Liabilities

The debt of the government also includes others like the outstanding against small-savings schemes, provident funds, deposits under special deposit schemes etc. These debts are shown under a separate head titled ‘other liabilities’.