Public Debt: Overview

Debt can be simply understood as the amount owed by the

borrower to the lender. The total financial obligations of
the public sector make up a nation’s gross government
debt, also known as public debt or sovereign debt.

The financial market where investors may purchase and sell

debt instruments of different forms and attributes is generally
referred to as the “debt market.”

Government borrowing over time is mostly due to prior

shortfalls in the budget. When a government’s expenses
exceed its receipts, a deficit results. Both domestic and
foreign people may be subject to government debt.

The sum is counted against the nation’s external debt if it is

owed to citizens of another country.

Debt instruments

A debt instrument is an asset that provides the lender

(investor), a fixed income on the asset from the borrower. The
lender receives the principal back in due course along with
interest payments.
The Reserve Bank of India has allowed the following bodies
to issue debt instruments in India:

 Central and State Governments

 Municipal Corporations

 Government agencies

 Banks

 NBFCs

 Public Sector Units

 Corporates

Types of Debt Instruments in India

The debt market in India is one of the largest in Asia and

broadly consists of government securities (G-Secs), including
central and state government securities and bonds issued by
corporations.

Debt products available include bonds, Certificates of

Deposit, Commercial Papers, Debentures, National Savings
Certificates, Government Securities, Fixed Deposits, and
more.
Government bonds:

 These are issues by central or state governments.

 These bonds act as a loan wherein the government

borrows money from investors at a predetermined
interest rate for a specific period.

 Government bonds fall under the broad category of

government securities (G-secs) and are issued under the
supervision of the Reserve Bank of India.

 The interest rate offered on the government bond, also

known as the coupon rate, can be either fixed or floating.

Debentures:

 Companies issue debentures to raise funds by borrowing

money from the public.

 The company thus promises to pay fixed interest to the

investors.

 These debt instruments may or may not be backed by any

specific security or collateral. Hence, the investors have
to rely on the credit ratings of the issuing company as
security.
Fixed deposits:

 Fixed deposits (FDs) are one of the most popular

investment products as they are versatile and flexible.

 Banks, certain Non-Banking Finance Companies

(NBFCs), and even post offices issue fixed deposits.

 They are popular due to their ease of investment,

liquidity (except in tax-saving FDs), and uncomplicated
nature.

Debt mutual funds:

 Debt Mutual funds invest the pooled money in fixed-

income products like government securities, corporate
bonds, and some part in money market instruments.

 Debt funds, also known as fixed-income funds, are

considered less volatile than equity funds as they invest
in fixed-income products. They also have a low-cost
structure.

Certificates of deposit

 Certificates of Deposit (CDs), introduced in India in

1989, are short-term debt instruments.
  Banks and Financial Institutions issue CDs in
dematerialized form against the funds that an investor
deposits for a specific term.

 The Reserve Bank of India lays down guidelines from

time to time for their issue and operation.

 All individual residents in India are eligible to buy

certificates of deposit. The minimum duration of a CD
issued by a bank is seven days and goes up to one year

Public provident fund:

 The Public Provident Fund (PPF) scheme is a popular

long-term investment product. PPFs have been around
since 1968.
 In this investment option, you put aside a small sum of
money regularly to create wealth in the long term.
 Interest rates are fixed by the government quarterly. And
the Investment and returns are tax-exempt.

Public debt

Public debt is the total amount borrowed by the government

of a country when the government’s revenue from taxes and
other sources falls short of its spending requirements.
In India, public debt includes the total liabilities of the Union
government that have to be paid from the Consolidated Fund
of India (Article 292).

It is further classified into internal & external debt. Internal

debt is categorized into marketable and non-marketable
securities.

 Marketable government securities include G-secs and T-

Bills issued through auction.
 Non-marketable securities include intermediate treasury
bills issued to state governments and special securities
issued to national Small Savings Fund among others.

Sometimes, the term is also used to refer to the overall

liabilities of the central and state governments.

 However, the Union government clearly distinguishes its

debt liabilities from those of the states.
 It calls the overall liabilities of both the Union
government and state General Government Debt (GGD)
or Consolidated General Government Debt.

The internal debt comprises loans raised in the open market.

  It also includes borrowings through treasury bills
including treasury bills issued by state governments,
commercial banks, and other investors.
 It also includes non-negotiable, non-interest-bearing
rupee securities issues to international financial
institutions.

The part of a nation’s debt that is borrowed from foreign

lenders, such as commercial banks, governments, or
international financial institutions, is referred to as its external
debt.

 These loans must typically be repaid in the currency used

to make the loan, plus any applicable interest.
 The borrowing nation may sell and export items to the
lending nation to get the required cash.

The amount of the government’s debt is crucial since a sizable

portion of annual payments (around 25%) are made merely
to cover the interest on the previous debt. For the current
fiscal year, the government’s debt is predicted to be about
62% of GDP.
The debt-to-GDP ratio shows how probable it is that the
nation will be able to pay off its debt. Investors frequently use
the debt-to-GDP ratio to determine the capacity of the
government to finance its debt. Global economic crises have
been fueled by higher debt-to-GDP ratios.

Public debt management

Sovereign or public debt management is the process of

establishing and executing a strategy for managing the
government’s debt to raise the required amount of funding.

It aims to achieve its risk and cost objectives and to meet any
other sovereign debt management goals the government may
have set, such as developing and maintaining an efficient
market for government securities.

In 2015, the creation of a statutory body called Public Debt

Management Agency (PDMA) was envisaged in India.

 As the RBI set interest rates and conducted the purchase

and sale of government bonds, it raised issues of conflict
of interest.
  Till the time a PDMA comes into place, the government
created an interim arrangement that deals with the
management of public debt called the Public Debt
Management Cell.

Public Debt Management Cell

Public Debt Management Cell is an interim arrangement

before setting up an independent and statutory debt
management agency namely the Public Debt Management
Agency (PDMA).

PDMC has the following advisory functions to the

Government:

 Plan borrowings of the Government, including market

borrowings, other domestic borrowings, SGBs
 Manage Central Government’s liabilities including NSSF,
and contingent liabilities.
 Monitor cash balances of the Government, improve cash
forecasting, and promote efficient cash management
practices.
 Advise other Divisions in DEA on matters related to
External Debt involving external borrowings through MI,
 Bilateral cooperation, and other possible sources, in terms
of cost, tenure, currency, hedging requirements, etc., and
monitor developments in foreign exchange markets.
 Foster a liquid and efficient market for Government
securities
 Develop interfaces with various stakeholders/agencies in
the regulatory/financial architecture etc. to carry out
assigned functions efficiently.
 Advice on matters related to investment and capital
market operations.
 Undertake research work related to new product
development, market development, risk management,
debt sustainability assessment, other debt management
functions, etc.
 Develop a database system for collecting and maintaining
a comprehensive database of Government of India
liabilities on a near real-time basis and shall be
responsible for the publication of relevant information.
 Carry out Preparatory work for independent PDMA.
Conclusion

An excessive level of public debt can result in higher interest

rates, which has a crowding effect on the amount of private
investment in the economy and the rate of economic
expansion as a whole.