Introduction:

Public debt, also known as government debt or national debt, refers to the total amount of money that a government owes to external creditors and domestic lenders. It is the result of the government borrowing to finance its spending, especially when its expenditures exceed its revenues. Public debt plays a crucial role in economic policy and is an important tool for managing a country’s financial needs and growth objectives. A public debt is

Note on Public Debt:

Public debt can be classified into various categories based on its nature, duration, and source:

1. Internal vs. External Debt: Money borrowed by the government from domestic lenders, such as citizens, banks, and financial institutions within the country. It is often raised through the sale of government bonds, treasury bills, and loans from local financial institutions. Money borrowed from foreign lenders, such as international financial institutions (e.g., World Bank, IMF), foreign governments, and private foreign investors. External debt is usually in foreign currencies like USD or Euros.
2. Short-Term vs. Long-Term Debt: Loans and borrowings that are due for repayment within a year. These typically include treasury bills and short-term bonds. Short-term debt is often used to meet immediate financial needs. Debt with a repayment period extending beyond one year, often up to 10 years or more. Examples include long-term government bonds and infrastructure loans.
3. Funded vs. Unfunded Debt :Long-term debt that has a fixed repayment schedule and is usually supported by a specific source of revenue (e.g., taxes or government assets). Short-term debt with no specific repayment source, typically covered by the government’s general revenues.
4. Productive vs. Unproductive Debt: Borrowed funds used for investment in projects that generate income or enhance economic growth. Examples include spending on infrastructure projects like roads, railways, and power plants. Borrowed funds used for purposes that do not generate direct income or assets, such as financing war expenditures or covering budget deficits.

Need and purpose of public debt:

Governments may borrow for several reasons:

1. To Cover Budget Deficits: When government spending exceeds revenue, borrowing helps bridge the gap and finance the deficit.
2. To Finance Public Sector: Borrowing is often used to fund large-scale infrastructure projects that are expected to boost economic growth.
3. Economic Stabilization: During recessions, governments may borrow to increase spending and stimulate the economy, often as part of a fiscal policy response.
4. To Meet Unforeseen Expenditures: In cases of emergencies like natural disasters, pandemics, or wars, borrowing helps cover urgent and unexpected costs.

Sources of Public Debt

1. Domestic Sources:
   • R.B.I and financial institutions
   • Commercial Banks
   • Individuals and private investors (through government bonds and securities)
2. International Sources:
   • Foreign governments
   • International financial institutions (e.g., World Bank, IMF)
   • Foreign private investors

Impacts of Public Debt:

Public debt can have both positive and negative impacts on an economy:

1. Positive Impacts:
   • Economic Growth: If the borrowed funds are invested in productive projects, it can lead to economic growth and higher future revenues.
   • Countercyclical Spending: Borrowing during economic downturns can help boost spending and stabilize the economy.
   • Infrastructure Development: Public debt can finance essential infrastructure that supports long-term economic development.
2. Negative Impacts:
   • Debt Servicing Costs: High levels of debt lead to significant interest payments, which can consume a large portion of government revenues, reducing funds available for other services.
   • Crowding Out: Excessive government borrowing can lead to higher interest rates, making it more expensive for private businesses to borrow and invest.
   • Risk of Default: If the debt becomes unsustainable, it may lead to a risk of default, damaging the country’s credit rating and increasing borrowing costs.

also read: explain the heads of expenditure of central govt.