Published: 22nd March 2011
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Q.1. discuss the types of public debt

ans – types of public debt


Public debt refers to the borrowings of the Government from individuals, banks, financial institutions, organizations and foreign countries.

When the public expenditure exceeds public revenue, the government resorts to borrowings. Thus, public debt is used to cover fiscal deficit .

The public debt has increased by 13.4 times between 1990-91 and 2009-2010


Public debt can be classified as under :



They add to the productive capacity of the economy They do not add to the productive capacity of the economy.

They are self liquidating They are not self liquidating

They are fully covered by assets of greater or equal value . thus, they are repaid by the income generated from these assets They are usually repaid through taxation and other sources . thus, they impose real burden on the economy.

Eg: Economic and social infrastructure Eg: financing war, famine, relief, etc.



Internal loans are raised within the country and subscribed by own citizens. External loans are raised from international financial institutions like IMF, etc.

They are raised from various instruments like market loans, bonds, treasury bills, advances from RBI, etc. They are raised multilateral loans from international institutions ,etc,

They can be short term, medium term and long term. majority of external loans are long term.

They are repayable in domestic currency The are repayable in foreign currency

They may be voluntary or compulsory . They are usually voluntary

They do not impose direct money burden, but they

Do not impose real burden on the economy. They result in direct money burden as well as real burden on the economy.



Generally public debts are voluntary in nature normally, the government does not obtain funds through compulsory means.

However, the government may force people to lend money in rare cases like war and emergencies .

Also, it invest in government securities under SLR.

They can be obtained from market loans, bonds, etc. They are obtained from banks, financial institutions and large corporations .

They can be used for development and non development activities. They are used during wars and emergencies



They mature within the period of one year The maturity period for long term debt is one year or more

The purpose is to meet revenue expenditure shortfall The purpose is investment in economic and social infrastructure .

They are obtained in the form of treasury bills and advances from RBI and the rate of interest is low They are obtained in the form of market borrowings and bonds and the rate of interest is high



Redeemable debts are repaid of a specified future date . irredeemable debts have no specified date for repayment

The principal amount, along with the interest there of , is repaid at the specified date. Though there is no date for repayment of the principal amount, interest is paid regularly.

most debts are redeemable in nature since it is a type of perpetual debt, the government does not, normally, resort to such borrowings.



Funded debts are obtained for a long term unfunded debts (floating debts) are obtained for short term usually one year

They are taken to meet current needs They are taken for building social and economic infrastructure

The government creates a special fund for repayment of such debts . There is no special fund created for repayment of such debts.

Q.2. Explain the trends and composition of public debt in india



Public debt refers to the borrowings of the Government from individuals, banks, financial institutions, banks and foreign countries.

Thus, public debt is used to cover the fiscal deficit during recent years, public debt in India has been groming rapidly.


Public debt comprises: 1) internal liabilities and 2) external debts.

The internal liabilities of the central Government are :

• Internal debt

• Other internal liabilities


The internal debt liabilities of the central Government amounted to Rs. 23,56940 crores (38.2% of GDP) internal debt comprises of the following :

1) Market borrowings:

The government raises funds by raising market loans. These are interest bearing loans having a maturity period of one year or more.

They are utilized by the Government for developmental and non developmental activities .

In 2009 -2010, market borrowings amounted to Rs.17,66,900 crores.

2) Treasury Bills :

Treasury bills are short term funds used to meet revenue short falls .

They are auctioned by the RBI of regular intervals and issued at a discount to face value.

The government issues 91 day, 182 day and 364 day treasury Bills.

3) Bonds:

The Government borrows funds by way of bonds. Bonds are issued for medium term to long term for the developmental expenditures of the Government .

Several bonds like Gold Bonds, National Rural development Bonds, capital investment bonds and special bearer bonds have been issued by the Government over the years.

4) Special floating loans :

These loans include the contribution of the Indian Government towards the share capital of IMF, world bank, international Bank for reconstruction and development and international development Association

These are non negotiable, non interest bearing short term debt and is liable to be paid back at the call of these institutions .

5) Special Securities by the RBI:

The Government issues non interest bearing non negotiable special securities to obtain temporary loans from the RBI.

These loans are issued for a maximum period of one year.

6) Ways and Means Advances:

These are temporary advances extended by the RBI to the Government .

They provide support for temporary difficulties that arise due to short fall in revenue.

They have to be repaid within a period of 3 months.

7) Securities against small savings:

A significant part of small savings has been converted into central Government securities.

These amounted to Rs. 204799 Crores in 2008.


These include : a) small savings

b) Provident funds

c) Reserve funds and deposits

a) Small Savings:

these include Post office savings and Time Deposits, National Savings Scheme, kisan vikas patra, National Savings Certificates, etc.

these savings are mostly used for planned development.

b) Provident funds: these include employees Provident Fund and Public Provident fund.

These are the liabilities of the Government . These funds offer attractive returns .

c) Reserve Funds and Deposits :

The government obtains funds by way of reserve funds and deposits various Government departments like Railways, Telecommunications, Posts, etc.

These funds are divided into interest bearing funds and non interest bearing funds.


The Government also obtains funds from external sources.

These external debts are raised and repaid in foreign currency .

They are used for development purposes

The external debt GDP ratio has declined over the years. In 2009-10, the ratio was 2.2%(Rs. 137680 crores)

These debts can be long term debts or short term debts.

Q. 3. Discuss the burden of internal and external debt in India.



Public debt refers to the borrowings of the Government from individuals, banks, financial institutions, organizations and foreign countries.

Thus, the Government resorts to borrowings from internal and external sources.

Repayment of these debts impose a burden on the citizens and on the socio-economic development of the nation.


1) Burden of Internal Debt:

The internal public debts are raised and repaid within the country.

Hence, there is no direct money burden

In fact, it transfers purchasing power from one group to another.

The Government resorts to taxation in order to pay the interests and the principal amount to the creditors . So, it imposes real burden real burden on the citizens.

a) Direct Real Burden :

The Government imposes taxes to repay internal debts and this results in transfer of purchasing power from the tax payers to the creditors .

If the tax burden falls on the poor, it will increase the inequality in income distribution and if the tax burden falls on the rich, the direct real burden will be less.

However, in developing economics, the relatively rich are the creditors of public debt and so, they are the real beacficiaries when the debt is repaid. This is the direct real burden of public debts.

b) Indirect Real Burden :

High rates of taxation have a negative impact on peoples ability and willingness to work save and invest. This has an adverse effect productivity, production and the investment of the economy.

c) Burden on future Generations :

Usually the older generations subscribe to government bonds and securities.

But, When the loans are repaid, taxes are usually imposed on the younger working population .

Hence the purchasing power gets transferred from the active working population to the older ones.

Thus, public debt has an adverse effect on the young

Working population :

d) Effect on Private investment :

The Government offers attractive rates of interest on its bonds and securities in order to raise huge funds.

Thus, a major part of the domestic savings is invested in Government securities, reducing the funds available for the private sector .

Hence, the growth of private sector is adversely effected.

e) Effect on Capital Expenditure :

In most developing countries like India, public debt is incurred to meet revenue deficit

Such are of public debt does not result in development of infrastructure or other capital expenditure and hence, it is considered unproductive

f) Burden of External Debt :

External Debt is raised from foreign countries. These debts result in inflow of capital into the borrowing country. At the time of repaying these debts, there is out flow of money in the form of interest and principal. Thus, external debts create money and real burden in the following way:

a) Direct Money Burden:

This is the sum of principal and interest made to the creditor country.

b) Direct Real Burden:

This is the loss of welfare suffered by the people of the debtor country because of repayment of debt this occurs because people of the debtor county contribute to repayment in the form of higher taxes.

c) Indirect Money Burden and Indirect Real Burden:

Inorder to repay public debt, the government increases taxes or reduces public expenditure

This leads to reduction in production and consumption in the economy

This creates indirect money burden and indirect real burden in the economy.

d) Burden of unproductive foreign Debt:

When foreign debts are taken for unproductive purposes , the burden of repayment will be extremely high on the debtor country.

e) Foreign Currency Burden: external have to be repaid in foreign currency.

So the government gives a lot of incentwis to the export sector . this will increase foreign exchange reserves by way of increased exports. This leads to diversion of resources from other sectors. thus these is unbalanced development in the economy.

f) Domination by Creditor Country:

Overdependence on one or more powerful creditor countries result in the debtor country being economically and politically dominated by them.

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