National debt /Sovereign Debt /Public Debt :
- Debt taken by the governments is national debt.
- It is said to be national as it is backed by the government which is national power.
- Public debt consists of budgetary as well as extra budgetary borrowings of the govt.
- Public debt is the accumulated borrowings of the govt over a period of time
- This type of debts are most reliable in the sense that such debt can't default as government is backing such debt.
- Default on national debt means government has failed .
- It can be from internal sources as well as external sources.
Internal debt can be of following types :
● Market loans
● Market Stabilisation Bills / Bonds
● Treasury Bills
● Other Special Securities issued to RBI
● Ways and Means Advances /14 days T-Bills
● Securities against Small Savings
● Cash Management Bills
Special Securities Issued to Public Sector Banks
External National debt includes:
- External Debt under the ‘External Assistance’ programme
- Multilateral loans (debt from Multilateral Creditors such as the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), Asian Development Bank (ADB) etc.
- Bilateral Debt (debt from sovereign countries with whom sovereign and non-sovereign entities enter into one-to-one loan arrangements).
- Other Government Debt includes IMF Loans, FPI investment in G-sec and defence debt .
Fiscal deficit VS public debt:
- Fiscal Deficit includes exclusively the budgetary borrowings.
- Fiscal deficit is the borrowings of the government for the current year
while
- public debt consists of budgetary as well as extra budgetary borrowings of the govt.
- public debt provides a better and holistic picture as compared to fiscal deficit.
Public Debt to GDP Ratio:
The debt-to-GDP ratio is the metric comparing a country's public debt to its gross domestic product (GDP).
Significance of Public Debt to GDP Ratio:
By comparing country's debt, with what it produces, the debt-to-GDP ratio reliably indicates that particular country’s ability to pay back its debts. As per FRBM Act, the Debt to GDP ratio should be around 60%.
•
40% for Central Government
•
20% for the State Government.
Centre’s outstanding debt reduced from 50.5% of GDP in 2013-14 to 48.1% in 2018-19 .Subsequently, it shot up to 50.7% in 2019-20 and 60.8% in 2020-21, before marginally dipping to 55.9% in 2022-23, 56.9% in 2023-24 and a budgeted 56% in 2024-25 .Increase in debt was on account of additional public health and social safety net expenditure requirements – amid a drying up of revenues during Covid-19.
India’s public debt (combined liabilities of the Central and State governments) to gross domestic product (GDP), at constant prices, increased to a record high of 105.23 per cent in 2021(Economic survey 2023).
Across the world, General government debt climbed from 108.7% of GDP in 2019 to 133.5% in 2020 and 121.4% in 2022 for the US; from 97.4% to 115.1% and 111.7% for France; from 85.5% to 105.6% and 101.4% for the United Kingdom; and from 60.4% to 70.1% and 77.1% for China during these years.
Impact of High Debt to GDP ratio on Economy:
•
Crowding Out Effect.
•
Major Part of Budget going to Interest
Payments.
•
Poor ratings by Credit Rating
Agencies.
•
Higher Borrowing Cost.
• Privatisation of Loss-making PSUs
How to control debt:
Public Debt to GDP Ratio is usually quoted as:
Public Debt ratio / GDP at current market prices.
Higher the denominator, lower the ratio
Denominator is directly proportional to ----------GDP and inflation. So GDP and inflation should be higher to lessen public debt to GDP ratio.
During 2003-04 to 2010-11 when general government debt plunged from 84.4% to 66.4% of GDP. That period, also witnessed an average annual GDP growth of 7.4% in real and 15%-plus in nominal terms after adding inflation, thus reining in public debt to GDP ratio.
Reasons for increase in Public Debt Ratio :
- Bank Recapitalisation,
- UDAY bonds,
- Small Share of Taxes in National Income,
- Imperfect Tax System
- Increase in public spending in response to Covid-19, and the fall in tax revenue and economic activity,
