PUBLIC DEBT

Public debt refers to the accumulation of annual budget deficits. It is basically the amount a country owes to lenders inside or outside of itself. Public debt is the sum of internal or external debt. The former refers to the public loans floated within the country while the later refers to public loans taken from other countries.

In India, public debt has increased tremendously over the years. This is mainly due to the fact that India is a developing economy the government requires massive investments in infrastructure and capital goods industries. For these purposes, they have to resort to borrowing. Development projects also involve a lot of raw materials. In the past few years the prices of petroleum products have increased significantly and so has it’s import bill in India. The exports however, have not increased in the same proportion. Consequently, the obligations of external debt has increased in India.
The total public debt of India in 2016-17 has been 50.3 per cent as a proportion of GDP. The external debt has to be paid in terms of foreign currency and it’s repayment creates serious problems.

A criteria of assessing the burden of public debt should not be the amount but how the funds are actually used. If public debt is wasted is becomes a problem rather than the debt which is used productively. It has been observed that in India a vast amount of external debt has been used for maintenance imports and has not really increased productive capacity. This shows that burden of external debt is quite heavy. Internal debt however, has been used more productively. A significant amount of it has been utilized for development of industries, railways, projects, services etc.
Just like the central government, the state government also faces problems of public debt. Over the years, the expenditures of state governments have increased more than the revenue they get. This is mainly because tax potential is not at its fullest. Large investments made in projects like electricity, irrigation etc. have not generated expected returns.
Since the burden of public debt is so heavy, economists have come up with different strategies to tackle it.
One way can be the reduction of interest rates. This is specifically for internal debt. Reducing the interest rate can bring down debt-GDP ratio. Interest rate can be reduced directly or indirectly by making debt less risky. A monetary policy which reduces risk and real interest rate can aid in doing so.
Selling a part of vast real estate can also help in raising resources. Government of India hold s a vast majority of real estate especially railways which hold a large amount of land along its rail tracks. Some economists have suggested the government to sell some part of this real estate to generate necessary funds.
Another way to curb public debt is to reduce public expenditure and increase revenues. Reducing public expenditure is not easy especially for India which is a developing economy. As far as rising revenues are concerned, suggestions have been made for increasing taxation. This is however, not feasible. A substitute for this can be building ways to reduce loopholes that allow tax avoidance.

Categories: Economy, Learning

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