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All You Need To Know About Public Debt
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What constitutes Public Debt ?
In India, public debt refers to a part of the total borrowings by the Union Government which includes such items as market loans, special bearer bonds, treasury bills and special loans and securities issued by the Reserve Bank. It also includes the outstanding external debt.
However, it does not include the borrowings such as small savings, provident funds and other accounts, reserve funds and deposits.
The aggregate borrowings by the Union Government—comprising the public debt and these other borrowings — are generally known as ‘net liabilities of the Government’
Internal Vs External Debt
Public debt may be raised internally or externally. Internal debt refers to public debt floated within the country while external debt refers loans floated outside the country.
The instrument of public debt take the form of government bonds or securities of various kinds. Such securities are drawn as a contract between the government & the lenders. By issuing securities the government raises a public loan & incurs a liability to repay both the principal & interest amount as per contract.
In India, government issues treasury bills, post office savings certificates, National Saving Certificates as instrument of Public borrowings.
The government bonds and T-Bills are traded in the market which is also known as Gilt Market. When government borrows from the domestic sources, the increase in inflation is less in comparison to simply printing the money.
External debt is owed to creditors outside the country. The outsider creditors can be foreign governments, International Financial Institutions such a World Bank, Asian Development Bank etc., corporate and foreign private households.
External debt may be of several kinds such as multilateral, bilateral, IMF loans, Trade credits, External commercial borrowings etc.
External loans are raised from foreign countries or international institutions. These loans are repayable in foreign currencies.
When the non-resident Indians park their funds in India, it is also a type of external debt and is called NRI deposits. If the external debt is denominated in Indian Rupee, it is called Rupee Debt.
Current state of Public Debt of India
India recorded a government debt equivalent to 68.70 percent of the country's Gross Domestic Product in 2017. Government Debt to GDP in India averaged 73.24 percent from 1991 until 2017, reaching an all time high of 84.20 percent in 2003 and a record low of 66 percent in 1996.
Current state of External Debt of India
External Debt in India decreased to 510428 USD Million in the third quarter of 2018 from 514442 USD Million in the second quarter of 2018. External Debt in India averaged 270297.38 USD Million from 1999 until 2018, reaching an all time high of 529685 USD Million in the first quarter of 2018 and a record low of 96392 USD Million in the third quarter of 2000.
External Commercial Borrowings
An external commercial borrowing (ECB) is an instrument used in India to facilitate Indian companies to raise money outside the country in foreign currency. The government of India permits Indian corporates to raise money via ECB for expansion of existing capacity as well as for fresh investments.
Any money borrowed from foreign sources for financing the commercial activities in India are called ECBs. The Central Government permits ECBs as a source of finance for Indian Corporates for expansion of existing capacity as well as for fresh investment.
Thus, ECBs are defined as money borrowed from foreign resources including the following:
Commercial bank loans
Buyers’ credit and suppliers’ credit
Securitised instruments such as Floating Rate Notes and Fixed Rate Bonds etc.
Credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as World Bank, ADB, AFIC, CDC, etc.
The DEA (Department of Economic Affairs), Ministry of Finance, along with Reserve Bank of India, monitors and regulates ECB guidelines and policies. India has always promoted capital inflows as a part of the development policy.
The chief purpose for accessing funds through ECBs has evolved over time, with refinancing being the primary reason in the recent past. The government follows a well-designed ECB policy - government puts ceiling for the total amount of ECBs that can be obtained by all Indian firms through the ECB route during a year. There are restrictions with regards to end use of the funds too. RBI recently liberalised the norms for ECB by including more sectors in the window
Advantages of ECB
ECBs provides access to international markets for the borrowers and gives good exposure to opportunities globally.
ECBs provide opportunity to borrow large volume of funds.These funds are available for relatively long term.
The Interest rates of the ECBs are lower compared to domestic funds.
Corporates can raise ECBs from internationally recognised sources such as banks, export credit agencies, international capital markets etc.
Due to rising NPAs there is low credit off-take from banks. So ECBs serve the financial needs of the companies.
The increasing composition of ECBs in external debt is a cause of concern for the Indian economy.
Availability of funds at a cheaper rate may bring in lax attitude on the company’s side resulting in excessive borrowing.
This eventually results in higher debt on the balance sheet which may affect many financial ratios adversely.
Since the repayment of the principal and the interest needs to be made in foreign currency, It exposes the company to interest and currency fluctuations.
How ECB is different from FDI?
In case of Foreign Direct Investment, the foreign money is used to finance the Equity Capital. But in case ECBs, foreign money is used to finance any kind of funding other than Equity.
What People say about - Is Public Debt: Good or Bad ?
This question leads to a lot of answers. It’s good till it becomes bad. It’s harmless until it does harm. Basically, it depends. Whatever else you might say, it’s basically unavoidable — virtually every country in the world has government debt.
Public debt has become a necessary evil. Without public debt, most of the schemes and investments planned by the Government, cannot be executed.
Only if the Government successively has a surplus budget, can the public debt be reduced. But the Governments are eager to step up spending and investments, be it in social sector projects, or to improve farm income, or to bring healthcare benefits etc. All these are not possible within the existing cash flows of the government.
In order to ensure that these schemes are implemented for the benefit of the citizen, the government borrows money from the market, and thus the fiscal deficit, which is excess of payments over receipts, are tackled.
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