Government Debt

Budgetary deficits can be covered in a variety of ways, including taxing, borrowing, and money printing. In order to finance such a deficit, governments have primarily relied on borrowing, which is referred to as government debt. The government’s outstanding debt will grow as a result of its continued borrowing year after year, increasing the government’s interest liabilities, which in turn may serve as another justification for future borrowing.

Perspectives on the Handling of Government Debt

• The government’s debt can be financed by raising money through taxation or by printing new money to pay for it
• In contrast, the government’s borrowing today may place a burden on future generations, as the money borrowed today may be repaid by the government decades later, with the funds coming from increased taxes on the younger generation, diminishing their discretionary incomes
• Furthermore, government borrowing from the public limits the amount of money available for investment in the private sector
• There is a dominant perspective on handling government debt. Essentially, it asserts that households are forward-looking and will base their spending not only on their current disposable income, but also on their expected future income, thereby increasing their current savings
• They will realize that borrowing money today will result in higher taxes in the future. Furthermore, the consumer will be concerned about the future generations of his or her family
• This view is also called the Ricardian equivalence, named after nineteenth century economist David Ricardo. He hypothesized that an increase in household savings would more than offset the dissaving that the government would be forced to do as a result of the budgetary deficit, resulting in the national savings remaining constant

Other Perspectives on Deficits and Debt 

Inflationary perspective

• One of the most common criticisms levelled against deficits is that they cause inflation
• An increase in government spending or a reduction in taxation both result in an increase in inflation
• However, it is possible that firms will be unable to meet the increased demand, resulting in a rise in the price of existing output
• A large fiscal deficit is typically accompanied by increased demand and output, and as a result, it is not necessarily inflationary

Crowding Out perspective

• In response to the government’s borrowing, the private sector’s ability to save decreases, resulting in a reduction in investment opportunities
• The reason for this is that if the government decides to borrow from private citizens by issuing bonds to finance its deficits, these bonds will compete with corporate bonds and other financial instruments for the limited supply of funds that is currently available
• If some private savers decide to purchase bonds, the amount of money available for investment in private hands will be diminished
• Some private borrowers will be pushed out of the financial markets as the government claims a larger share of the economy’s total savings, resulting in a “crowding out” effect

However, the aforementioned perspectives are valid in the context of a government deficit and resulting debt that are unable to increase incomes in the economy as a result of the deficit. If incomes continue to rise steadily as a result of deficit budgets, the negative externalities can be partially offset.

In the same way, investing in better infrastructure today may prove to be extremely beneficial for future generations in the future.

External debt of India

• The total amount of debt owed by India to foreign creditors is referred to as its external debt
• It is possible that the debtors will be the Union government, state governments, corporations, or Indian citizens
• The debt portfolio includes obligations to private commercial banks, foreign governments, and international financial institutions such as the International Monetary Fund (IMF) and the World Bank
• According to figures from the Reserve Bank of India, India’s external debt stood at $570 billion at the end of March 2021, representing a rise of $11.5 billion over the previous year’s end-of-March figure
• Repayment: In accordance with data from the Reserve Bank of India, debt service, which is defined as the sum of principal and interest payments, will have increased to 8.2 percent of current receipts by March 2021. It was 6.5 percent at the end of March 2020, according to the Bureau of Labour Statistics. This is due to higher repayments by India and lower current receipts by the United States

Internal debt of India 

• India’s internal debt is made up of loans raised on the open market, compensation and other bonds, and a variety of other financial instruments and obligations
• This category also includes borrowings made through the issuance of treasury bills, which may be made available to state governments, commercial banks, and other investors
• Also included in the internal debt are rupee securities issued to international financial institutions that are non-negotiable and do not bear any interest

Conclusion 

The COVID-19 pandemic affected the third-largest economy in Asia for the second year in a row, with disruptions and uncertainty caused by repeated waves affecting private consumption, consumer behaviour, and supply chains. The pandemic has also hastened the transition from traditional media to online platforms. Budgetary stimuli for the economy and a response to the pandemic have caused the country’s fiscal deficit and government debt to grow in 2020 and 21. Although revenue growth in 2021-22 is expected to be strong, the government expects to meet its targets for the year while maintaining support and increasing capital spending.