Public debt – the borrowings taken by the Government

Introduction 

The modern-day government sometimes cannot fully finance its requirements with the aid of public earnings. So, what can it do about this issue? Well, the alternative that the government can take up is that of public debt. The practice of taking up borrowings originated in the eighteenth century. Regardless, from the nineteenth century onwards, the significance of this debt was boosted in almost all the Democratic nations. This has endorsed the solid foundation of the economy. 

Meaning of public debt

The borrowings taken by the authority to finance their developmental activities, apart from the public earnings, are referred to as public debt. This is taken either from inside the country or from abroad. In the case of the government, public debt is a crucial means to cover their expenditures, without curtailing the real wealth of private individuals and corporations. The meaning of public debt highlights the net liabilities of the government. Public debt from within the country includes borrowings from business houses, banks and other organizations within the country. On the other hand, public debt from abroad means loans from International agencies and distant countries. 

Objectives of public debt 

The government usually turns to this debt to meet three sorts of expenses. 

a)To meet budget deficit 

It is not always appropriate to increase the taxes on individuals whenever the expenditure of the government exceeds revenue. So this is where public debt comes into play. If the budget deficit created is casual, then it can raise public debt. But, if it’s a regular thing, then the government has to raise taxes.

b)To meet situations like war

Public debt earned great importance during the times of World War II. Nations take this up to finance their expenditures during the war. 

c)For development purposes 

The authorities also take it to finance and fund the development projects. This gained much importance during the British regime when the public debt was raised for the objective of development in India. 

Types of Public debt

The structure of public debt varies from country to country. It is not uniform throughout the world, because of changes in the conditions and purpose. There are several types of public debt. Based on that, public debt is categorized into:

1)Internal and external debt

Amounts owed to the citizens and corporations within the country are referred to as internal debt. On the other hand, the debt owed to foreigners and international agencies is classified under external debt. 

2)Short term and Long term loans

This classification is based on the duration period from taking up debt and then repaying it with interest. Short-term loans are taken up to cover temporary deficits of the country, whereas the long term is turned to for development in the country. 

3)Funded and Unfunded debt 

Funded debt is a long-term debt reimbursed through a separate account made by the government. On the other hand, the unfunded one is a short-term debt whose reimbursement is made out of the public revenue. 

4)Voluntary and Compulsory Loans

In normal times, the loans lent by the individuals are under their willingness, this is termed as voluntary loans. However, during times of emergencies, the lending can also be involuntary. This is termed a compulsory or forced loan. 

5)Redeemable and irredeemable debt

Redeemable loans carry with them a promissory date of repayment of the debt. But in the case of irredeemable, there is no kind of promissory date for the reimbursement. However, interest is paid regularly to the lenders.   

6)Productive and Unproductive Debt

When the debt is used up on income-earning enterprises, then it is referred to as productive debt. On the other hand, if the activity doesn’t yield any income to the government, then it is termed an unproductive debt. 

Public debt management

The process of ascertaining an efficient technique for the management of the debts taken by the government is known as public debt management. It is looked at in such a manner that the funds are raised at the minimum possible cost. The policy should try to serve not only this debt but also other debts as well. It simply ensures the making of a portfolio stating all the crucial methods that are to be pursued and keeping the development of a country at satisfactory levels. 

Debt managers should always take care of the unnecessary expenditures that the government can incur within the process of reimbursement. In addition, they should be made aware of the financial liabilities and risks that might come their way. So, which organisation takes care of all this? It’s the International Monetary Fund (IMF) that reviews the guidelines mentioned under the Public Debt management annually. In India, the institutions responsible for the management of the public debt are the Reserve Bank of India, Ministry of Finance, Office of Aid and Accounts Division and Budget Division.  

Conclusion

Public debt has both positive as well as negative views. Some consider this as good and some as bad. In the positive view, public debt is considered a promising way of putting funds into the development of the country. Notably, this is much better than the FDI from foreign countries. If used correctly and efficiently, it can enhance the standard of living of the people in a country. But on the other side, public debt is deemed bad due to high-interest rates, expensive economic expansion and their use in gaining votes by the political parties. So, to avoid these conflicting viewpoints, the government locates that sweet spot of public debt that doesn’t prove to be bad for the economy.