According to economics literature, Debt and Monetary financing are the sources of financing fiscal deficit. Debt consists of domestic and external borrowing. For any Economy Public Debt is one of the major factors (or say indicator) which shows the health of the economy. Many economies around the world are facing the problem of an increase in their Debt. The surge in public debt has got more attention in recent months all over the world.

Public debt plays an important role in economic development. Governments opt for it to finance their human capital, expenditures, infrastructure and better future. At the same time, public debt can also be a heavy burden when it grows too fast – this is what is happening today across the world, esp. in the USA. 

In this article, we will see the definitions of Public Debt and its importance. What should one look at gross or net debt? Which is more relevant, the Central Government debt alone or the State Government debt alone?  What is the present status of the public debt in India and ends with a conclusion. Now, let’s delve into the subject.

Definition of Public Debt

Public debt is also known as government debt. This represents the total outstanding amounts owed by different levels of government and used to finance deficits resulting in more spending. In simple terms, it is the total amount of money owed to creditors by the Government. Public Debt is often expressed in terms of a ratio of Gross Domestic Product (GDP).

Debt can be raised within the country (i.e. internally) and outside the country (i.e. externally). The Debt raised within the country is called internal debt, which means the Government owes to the domestic lenders; whereas the debt raised outside the country is termed as external debt, which means the debt obligations to the lenders outside the country.

Why Public Debt Is Important?

Public Debt is important to fund the gaps (or holes) in the Budget as well as public spending. In simple, it fills the gaps between expenditure and revenue. That is when the Government’s income is greater than expenditure, then there will be a deficit – to fill this deficit government borrows money. These borrowings become essential to meet the deficits. The government may borrow money to develop its infrastructure to meet its future demands, develop human capital and also to induce private investments (esp. during recession and stagnation periods).

What do we look at  – gross or net debt and why?

Gross debt is normally referred to as “Total Debt” (i.e. the total debt liabilities). This consists of all liabilities which debt instruments; where a debt instrument is defined as the monetary claim which requires payments of interest along with (or without) principal by the debtor (i.e. the Government here) to the creditor (may be internal or external) at the date of maturity.

Net Debt of Government is calculated as gross debt (financial liabilities) minus gross Assets (financial assets) corresponding to debt instruments.

Since Gross debt data are readily available and widely published. Since the Gross debt also includes interest payments it is more important to look at it.

Central Government debt or State Government debt – which is more relevant?

As the name denotes the Central Government debt denotes the debt owned by Central Government and State Government debt denotes the debt owned by State Government.

Now, there is something called General Government Debt – which is defined as the indebtedness of the Government Sector (i.e. Central, State Governments and UTs with the Legislature). It is a consolidated figure of the liabilities of the Central Government, State Governments and UTs with the legislature by taking out inter-governmental transactions.

When one looks at a nation as a whole then the General Government Debt is more important. And since it is a consolidation of all 3 debts (i.e. Central, State Governments and UTs with Legislature), we cannot ignore or overlook any of these debt data.

Present Status of the Public Debt

On 23rd October 2023, the Status paper on Public Debt (2021-22) was released by the Ministry of Finance. It shows that the General Government Debt ratio has declined from 87.8 per cent at the end of March 2021 to 83.3 per cent of GDP at the end of March 2022.

Source: Status Paper on Government Debt, 2021-22, Department of Economic Affairs, Ministry of Finance.

The debt-GDP ratio of States and Union Territories has declined from 31.0 percent at end-March 2021 to 28.9 percent at end-March 2022. Within the overall debt portfolio of the State governments, the share of debt has increased. The following table shows the status of the consolidated figures of the General Government Debt for the past five years

Source: Status Paper on Government Debt, 2021-22, Department of Economic Affairs, Ministry of Finance.

To understand and know the medium and long-term sustainability of the Country one of the vital indicators is the Debt-GDP ratio. From the above table, one can see that the Central Government debt has declined from 61.5 percent in 2021-22 to 59.1 percent in 202-23 – this reflects fiscal prudence by reducing the gross fiscal deficit.

The State Government and UT’s, Debt-GDP ratio has declined from 31.0 percent in 2020-21 to 28.9 percent in 2021-22.

Source: Status Paper on Government Debt, 2021-22, Department of Economic Affairs, Ministry of Finance.

Conclusion – My Perspective

When the public debt is compared to the economic parameters like economic growth or savings rate it shows that India is in a better position. It has to be noted that the combined interest payments to revenue receipts have also declined to 26.4 percent in 2021-22 from 29.8 percent in 2020-21. This shows that the economy is in a better position compared to 2020-21. However, when one compares to pre-pandemic or say even 2019-20 the public debt has increased. However, since Public Debt in India is mainly contracted at fixed rates. The Floating internal debt constitutes a meagre of 1.9 percent of GDP at end-March, 2022.

It is to be noted that the data is for 2021-22 which was when the economy had just opened up after the pandemic. So it is too early to conclude anything and say how it is; therefore, we need to wait and see how the economic strategies of Public Debt Management work in future. It is important to be vigilant on Public Debt and its Management as the consequences of its Surge may be disastrous for the economy.

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