SVKM's Pravin Gandhi College of Law

B.L.S LLB / First Semester

Economics
Submission Date- 31st May 2021

Public Debt in India

Submitted to-
Mr Jaison Thomas
SVKM’s Pravin Gandhi College of Law
University of Mumbai

Submitted by-
Aashna Doshi
B009
 Public Debt in India
Introduction
Fiscal funding is a universal concern around the world, and India is no different. Whether its
tax revenue sharing between the federal government and the states, rebounding from a financial
crisis, or dealing with a pandemic, all of these factors affect a country's public debt. While
India's public debt-to-GDP ratio is not as bad as in some other countries, it is critical to
comprehend the variables that have shaped its public debt dynamics. It's also crucial to
comprehend the impact of major macroeconomic reforms in determining India's debt
trajectory. 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. The Governments’
borrowing also called Public Debt or National debt is the means of financing government
operation but it is not the only source of financing. The other sources of financing deficit
include tax revenue which includes direct tax as well as indirect tax and non-tax revenue which
include income from Public Sector Undertakings, dividend paid to the government, interest
received on loans given et-cetera. Government can also create money to monetize their debt,
thereby removing the need to repay the debt and the interest. But in the light of low revenue
and capital receipts in India public debt or public borrowing becomes an essential part of
governments’ obligation of meeting its expenditure for social and economic purposes. Debt is
generally bridged by issuing bonds or treasury bills which are purchased by market participants
like banks, insurance funds, pension funds and other institutions. Governments' need to borrow
to fund deficit budgets has resulted in the emergence of numerous types of public debt, which
are now a major part of all capital markets.
Theoretical Perspective of Public Debt
Public debt is the debt owned by the central government of a country. It is one of the major
sources of financing the deficit of the economy. The essential point, however, is whether or not
public debt places a burden on the government. In sight of this, it is critical to define the nature
of the public debt burden. The burden of public debt, according to Professor Domar, should be
defined as the ratio of total debt to total national income. The burden of the debt would increase
if total national revenue remained constant but total public debt increased year after year.
However, if national income rises in tandem with the increase in public debt (at a faster pace
than the growth of public debt), the burden of public debt, defined as the total amount of public
debt divided by the entire amount of national revenue, will actually decrease. In other words,
when national income rises, the total amount of revenue collected by the state rises as well,
resulting in a larger and greater public debt imposing a smaller and smaller burden. As a result,
Domar contends that even if the total amount of public debt increases, the burden of public
debt will decrease if national income rises faster than the total amount of public debt. Dr. Lerner
believes that when unemployment is combated through deficit spending and the public debt
grows as a result, the weight of the public debt should be evaluated against the cost of
unemployment that would exist if there were no deficit spending programme for job creation.
And if policymakers take this into account, the public debt burden will be significantly reduced,
if not zero or negative. There is another point of debate that must be addressed i.e. “whether
the system of financing a project by means of public debt shifts the burden to the future
generation.” According to Musgrave, if the borrowed funds are used for capital expenditures,
the advantage will last into the future, therefore burden sharing should be required as a matter
of intergenerational equality. As a result, dividing the budget into a current and capital
component, with the former taxed and the latter loaned, seems logical. He builds a case in
which, regardless of generation 1's attitude to tax or loan finance, loan finance always shares

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the cost among generations, whereas tax finance cannot. In this way, loan financing shifts the
cost on future generations.

Public Debt in India- Good or Bad?

The return on all investments backed by money produced from public borrowing does not have
to overlap the gross interest requirement in the Indian context, we can access the burden of
public debt in terms of gross interest obligation. The monies produced by borrowing from the
public to pay the revenue account deficit yield no interest, and the interest obligations on such
loans must be met through other means. As a result, the revenue account deficit is the worst
type of deficit because the monies obtained to finance it do not yield interest, causing the
government's expenditure on other social responsibilities to suffer. But there are ventures
which are financed by public borrowing yield returns, and that too in the form of interest
receipts, profits and dividends. In 1980-81 as much as 84.3% of the interest paid on the total
public debt of the centre was recovered as interest receipts, dividends and profits. The
corresponding figure for 1990-91 and 1992-93 are worked out to be 44.5 % and 50%
respectively. Thus during this decade that is 1980-90 the net interest outgo has been quite
phenomenal and thus the recovery ratio (defined as receipts on account of interest, dividend
and profits divided by interest payment on borrowing) has declined substantially. Deployment
of funds by the government for the purposes which are not directly remunerative, in the sense
of yielding interest dividends or profits, could still be quite productive to the economy as a
whole in the sense of improving its efficiency of production or adding to its productive capacity
through improved economic and social infrastructure. In such circumstance, one may
reasonably expect public investments to result in stronger national income growth and, as a
result, higher government revenue receipts, particularly tax receipts. However, even if the
overall public debt is at an all-time high, the increase in central government receipts as well as
tax receipts has been significantly less than the increase in the gross interest requirement in
recent years. While the constructive impact of a major chunk of government spending cannot
be discounted, the truth remains that it has failed to translate into increased revenues for the
Indian government. The increasing relative burden of the net interest outgo can entail either
less non-interest government spending or a larger fiscal deficit, or a mixture of both, if direct
returns from government investments do not expand as public debt grows and government
revenues do not grow as well. A vicious circle can arise as a result of this process, with higher
deficits leading to increased borrowing, which leads to even higher deficits as a result of the
greater net outgo in the form of interest. A combination of a low recovery ratio and a lack of
revenue mobilisation are the main causes of this vicious spiral. And that is exactly what is
happening in our nation, where the government is decreasing non-interest government
spending in order to minimise the fiscal deficit, which is in some ways a compromise on the
government's social and economic commitments. In the case of India, where the government
is unable to put its public debt to constructive use while also failing to earn adequate tax income
to satisfy its interest obligations, public debt can be termed undesirable.
What is the size of Public Debt?
The size of the government debt is important as a sizeable chunk of annual payments (around
25 per cent) is just the interest cost for the past debt. According to the Economic Survey
2018-19, total liabilities of the Central Government at end-March 2019 stood at Rs 84.7 lakh
crore and 90 per cent of which was public debt. General Government Debt (GGD)-GDP ratio
which includes the combined debt of Centre and states worked out to 67.4% at the end-March
2017.

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Conclusion
Today, almost no country in the world has not taken loans (internal or foreign) to run its
operations. Actually, the fundamental reason for this is that the government's primary goal is
to improve the welfare of the country's population. India's external debt was about 85 billion
dollars in 1991, which increased to US$446 billion in 2014 and US$ 564 billion of GDP by the
end of December 2019. An increase in the external debt is not a good sign because the county
needs to repay this debt in foreign currency, i.e. dollars and other foreign currencies.
Governments' need to borrow to fund deficit budgets has resulted in the emergence of
numerous types of public debt, which are now a major part of all capital markets. Governments
may owe public debt in the form of bonds, notes, bills, and other instruments that bind holders
to make specific payments at specific dates. The main difference between public and private
debt is that public debt is owed by the government rather than private persons or organisations.
When it comes to the benefits and drawbacks of the public debt, it has both.

References

Musgrave, R. A. (1973). Public finance in theory and practice. McGraw-Hill Kogakusa.

Tackling the Growing Burden of Public Debt, Economic and Political weekly May 1 1993.

Piyush Bhadani (2016). Public debt: Issues, Challenges and trends in India. International
Journal of Current Research 8, (01), 25758-25763

Buiter, W. H., & Patel, U. R. (1992). Debt, deficits, and inflation: an application to the public
finances of India. Journal of public Economics, 47(2), 171-205.

Economic Survey 1980-81 to 2010-11: http://indiabudget.nic.in/

https://economictimes.indiatimes.com/budget-faqs/what-constitutes-public-
debt/articleshow/73420992.cms?utm_source=contentofinterest&utm_medium=text&utm_ca
mpaign=cppst

https://www.jagranjosh.com/general-knowledge/debt-on-indian-government-1591004800-1

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