Public Debt

Notes

Public debt is the money the Government has borrowed, to be repaid with interest.

Composition

Internal debt: borrowed within India in rupees: dated securities, Treasury bills, small savings (NSSF) and special securities. It is the larger share (about 95% of the Centre's public debt).
External debt: loans from foreign governments, the World Bank, ADB, IMF and other multilaterals, in foreign currency. The Government records it at historical exchange rates.
Public Account liabilities (small savings, provident funds) are also counted in total liabilities.

Constitutional provisions: Art. 292 (Union borrowing within limits Parliament sets), Art. 293 (States may borrow only within India, and need the Union's consent if they owe it money), Art. 266 (Consolidated Fund of India).

Debt management

The RBI is the Government's debt manager. The Government Securities Act, 2006 (and the Public Debt Act, 2021) govern issues. Instruments: dated G-secs (5-40 years), T-bills (91, 182 and 364 days), cash management bills, State Development Loans (SDLs), floating rate bonds, inflation-indexed bonds and Sovereign Gold Bonds. RBI Retail Direct lets individuals buy G-secs.

Measures and norms

Debt-to-GDP ratio: the N.K. Singh Committee (2017) recommended 60% (Centre 40%, States 20%). The Centre's debt is about 56-57% of GDP, and general government debt (Centre and States) is above 80% (the pandemic raised it).
Interest payments take roughly one-fifth of the Union Budget and a large share of revenue receipts.

Debt sustainability (the r-g rule): if the growth rate of GDP (g) exceeds the interest rate (r), the debt-to-GDP ratio can fall (Domar's condition). A debt trap occurs when borrowing is needed just to pay interest.

Burden: internal debt is "owed to ourselves" but redistributes income and can crowd out private investment; external debt requires a transfer of real resources and exposes the country to exchange-rate risk. Note that India's external debt (government and private, about 19% of GDP) is different from the Government's external debt.

States: the States' fiscal rules limit net borrowing (generally 3% of GSDP, with conditions).

Key Points

Public debt: internal (rupee, about 95%) and external (foreign currency).
Art. 292 (Union) and Art. 293 (States) govern borrowing.
RBI manages debt; instruments: G-secs, T-bills, SDLs.
N.K. Singh Committee: 60% debt-GDP (Centre 40%, States 20%).
Debt is sustainable when growth exceeds the interest rate (r-g).

MCQs

Q1. The Union Government's borrowing is governed by: (a) Art. 266 (b) Art. 292 (c) Art. 293 (d) Art. 280 Ans: (b).

Q2. Which of the following is a short-term government security? (a) 10-year G-sec (b) Treasury bill (c) Sovereign Gold Bond (d) State Development Loan Ans: (b). Maturity of 91, 182 or 364 days.

Q3. The debt-to-GDP target recommended by the N.K. Singh Committee for the general government is: (a) 40% (b) 50% (c) 60% (d) 80% Ans: (c).