Public Debt: Components, Contributing Factors & Management

Introduction

Public debt is the total amount, including total liabilities, borrowed by the government to meet its development budget. It has to be paid from the Consolidated Fund of India. The term is also used to refer to overall liabilities of central and state governments, but the Union government clearly distinguishes its debt liabilities from the states

Overview of Central Government Liabilities and Debt Management

• Classification of Liabilities: The central government broadly classifies its liabilities into two categories: 
  • Debt contracted against the Consolidated Fund of India, and public account.
• Over the years, the Union government has followed a considered strategy to reduce its dependence on foreign loans in its overall loan mix. 
• Internal Debt: Constitutes over 93 per cent of the overall public debt. 
  • Internal loans: Divided into two broad categories, marketable and non-marketable debt.
• Sources of Public Debt: Dated government securities, treasury bills, external assistance, and short-term borrowings.

Components of Government’s Debt and Liabilities

• Market Borrowings:
  • This is the most significant portion of the government debt.
  • Includes government securities (G-Secs) such as treasury bills and dated securities issued through auctions.
• Loans from Banks and Financial Institutions:
  • Loans taken from domestic banks and financial institutions.
  • Often used for specific projects or bridging short-term funding gaps.
• External Debt:
  • Borrowings from foreign governments, international financial institutions, and through sovereign bonds issued to foreign investors.
  • Includes loans from the World Bank, Asian Development Bank, and bilateral credits.
• Small Savings and Provident Funds:
  • Funds accumulated through various small saving schemes like the Public Provident Fund (PPF), National Savings Certificate (NSC), and other saving instruments.
  • These savings are often used by the government for its expenditure needs.
• State Development Loans (SDLs):
  • Loans taken by state governments, but the central government may also bear a portion of this debt.
  • Issued through securities to fund various state-level projects.
• Securities Against Small Savings: Debt instruments issued against small savings collections.
• Treasury Bills:
  • Short-term debt instruments issued by the government to meet immediate financial needs.
  • Generally, they have a maturity period of less than one year.
• Special Securities Issued to RBI: Special bonds or securities issued to the Reserve Bank of India under specific circumstances.
• Other Liabilities: Includes various other forms of borrowings like oil bonds, fertiliser bonds, etc., which are typically issued for specific purposes.

Factors Contributing to Increased Public Debt in India

• Bank Recapitalization Efforts:  The infusion of capital into state-owned banks via recapitalization bonds in 2017-18 significantly raised the central government’s debt both in absolute terms and as a percentage of GDP.
• Issuance of UDAY Bonds: State liabilities escalated in 2015-16 and 2016-17 due to the issuance of Ujwal Discom Assurance Yojna (UDAY) bonds.
• Low Tax-to-GDP Ratio: Despite a fourfold increase in national income since independence, India’s gross tax-to-GDP ratio stands at around 10.2% as of 2021. 
  • The majority of tax revenue is derived from indirect taxes.
• Flaws in the Tax System: The Indian tax system is plagued with inefficiencies, leading to high levels of tax evasion.
• Inefficient Use of Public Funds: Significant amounts of public funds are expended inefficiently in government departments, often marred by corruption, bribery, and bureaucratic red tape, leading to reduced productivity and wastage of resources.

Public Debt Management and associated agencies in India 

1. Reserve Bank of India (RBI):

• The RBI plays a central role in the management of India’s internal debt.
• As per the Reserve Bank of India Act, 1934, the RBI serves as both the government’s banker and public debt manager.
• It is responsible for issuing government securities, managing the government’s debt, and handling monetary policy, which influences interest rates and debt servicing costs.

2. Ministry of Finance, Government of India:

• The Ministry of Finance is responsible for overall fiscal policy and debt strategy.
• The Department of Economic Affairs within the Ministry oversees external borrowings, sovereign credit ratings, and liaises with international financial institutions.

3. Securities and Exchange Board of India (SEBI):

• SEBI regulates the securities market in India, including the trading of government securities.
• It ensures a transparent and efficient market for government bonds, impacting their attractiveness to investors.

4. Public Debt Office (PDO):

• Operated under the RBI, the PDO is responsible for the issuance and servicing of government securities.
• It maintains the records of government debt and ensures timely payment of interest and principal to investors.

5. Fiscal Responsibility and Budget Management (FRBM) Review Committee:

• This committee reviews the government’s fiscal discipline and adherence to budgetary targets, indirectly influencing public debt management strategies.

6. Banks and Financial Institutions:

• Banks and financial institutions are major subscribers to government securities.
• Their participation in government debt instruments is crucial for the success of debt auctions and overall debt management.