Public Debt In India - Debt Obligation of the Government

Introduction To The Public Debt In India ↓

During recent years, public debt in India has been growing at an alarming rate. The under developed nature of the economy & institutional credit deficiencies makes the financing of economic development a complicated problem.

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Hence the government has to play a key role in stimulating the rate of capital formation & in promoting the economic development of the economy.

So public debt can be used by the government as means for mobilising the resources.

The following table indicates the composition of public debt of the Central Government of India.

From the above table, it is clear that the Central Government of India's debt has increased by over 7 times between 1990-91 and 2005-06. Apart from internal debt, there are also internal liabilities of the Central Government in the form of small savings of the public, provident funds, and reserves funds and deposits of Government departments.

A. Internal Debt ↓

The internal debt is a major component of public debt of the central government of India.

The following are the various components of internal debt.

1. Market Loan

These have a maturity period of 12 months or more at the time of issue and are generally interest bearing. The government issues such loans almost every year. These loans are raised in the open market by sale of securities or otherwise. Total market loans as at the end of March 2005 are estimated at Rs. 7,58,999 crores.

2. Bonds

The Government borrows funds by way of issue of bonds. The government obtains funds through the issue of bonds such as National Rural Development Bonds, Central Investment Bonds. The bonds are issued at different maturity periods, which may range from 3 years to 10 years period. They provide medium-term to long-term funds to the government.

3. Treasury Bills

A major source of short-term funds for the government is obtained by issue of treasury bills. At present, government issues 91 day and 364 day treasury bills. The treasury bills are purchased by commercial banks and others. The amount of debt as a result of Treasury bills decreased from Rs. 64,760 crores in 1997 to Rs. 7,184 crores as at the end of March 2006.

4. Special Floating and Other Loans

These represents India's contribution towards share capital of international financial institutions like IMF, World Bank, International Development Agency and so on. These are non-negotiable and non-interest bearing securities. The Government of India is liable to pay the amount at the call of these institutions. Accordingly, it is a short-term debt upon the Government of India.

At the end of March 2006, special and other loans rose to Rs. 21,631 crores.

5. Special securities issued by RBI

The government obtains temporary loans for a period of maximum 12 months from RBI and issues special securities, which are non-negotiable and non-interest bearing. Such securities provide short term funds to the Government.

6. Ways and Mean Advances

The Government of India obtains ways and means advances from the Reserve Bank of India to meet its short period expenditure. These debts are purely temporary in nature and are usually repaid within three months.

7. Securities against small savings

Since 1999-2000, under the new accounting system, national small savings have been converted into the Central Government securities. As a result there has been a sharp increase in internal debt and corresponding decline in small savings. At the end of March 2006, securities against small savings amounted to Rs. 2,06,631 crores.

B. External Debt ↓

External debt refers to the liabilities of the Indian Government, public sector, private sector and financial institutions to overseas parties.

The government of India has raised foreign loans from U.S.A, U.K, France, U.S.S.R, Japan, etc.

External Debt rose from Rs. 31,525 crores in 1990-91 to Rs. 68,392 crores in 2005-06.

The external debt can be broadly divided into two groups :-

A. Long term debt :

1. Multilateral borrowings,
2. Bilateral borrowings
3. Loans from IMF, World Bank, etc.

B. Short term debt :

It is to be noted that the overall external debt of India comprises of Government debt and Non-government debt. The Government debt is owed by Govemment authorities, both Central and State Governments, whereas the non-Government debt is owed by private parties in India. In terms of composition, India's external debt has shifted in favour of private debt over the last decade.

C. Other Internal Liabilities ↓

The government does not include liabilities under Public Debt. However, the government is liable to make repayment of these liabilities.

1. Small Savings

In recent years small savings have increased due to rising money income in the economy.

Recently the Government of India launched a number of small savings instruments. These include 9% Relief Bonds 1987, Kisan Vikas Patras, Indira Vikas Patras, etc.

The outstanding amount of small savings increased from Rs. 2,209 crores in 1971 to Rs. 4,18,110 crores at the end of March, 2006.

2. Provident Funds

Provident funds are divided into two categories :-

1. Employee Provident Funds meant for employees.
2. Public Provident Funds meant for general public.

Outstanding amount under provident fund stood Rs. 66,217 crores at the end of March 2006.

3. Other accounts

Other accounts include Postal Insurance and Life Annuity Fund, Borrowings against Compulsory Deposits, Income Tax Annuity Deposit, Special Deposit of Non-Government Provident Fund and Outstanding Amount.

Other accounts were Rs. 1,76,649 crores at the end of March 2006.

4. Reserve Funds and Deposits

Reserve Funds and Deposits are divided into two categories :-

1. Interest bearings and
2. Non-interest bearings.

They include depreciation and reserve funds of Railways, Department of Post, Telecommunication, Deposits of Local Funds, Departmental and Judicial Deposits, Civil Deposits, etc.

Reserve Funds and Deposits increased to Rs. 1,01,170 crores at the end of March, 2006.

Conclusion On Public Debt In India ↓

The main reason for increase in internal public debt in India during 1961-2004 was the requirement of funds for financing various developmental programmes as both tax and non-tax revenues were totally inadequate to finance the government expenditure.

The external public debt in India Increased significantly during 1961-2004 as it was utilized to make import payments and solve balance of payment problems.

The tremendous rise in total public debt in India during 1991-2004 provides an alarming signal to Indian economy. There is an urgent need to manage public debt in India.