Burden Arising Out of Public Debt

Topics: Debt, Tax, Public finance Pages: 6 (1709 words) Published: March 22, 2012
Burden Arising out of Public Debt


* Level of indebtedness of the government of India

* Burden of internal public debt

* Burden of external public debt

* Shifting the burden of public debt

* Bibliography

The Level of indebtedness of the Government of India

In India, the traditional concern for public debt has been with fiscal deficits (both Centre and State) and with the size and maturity of the country's external debt. Somewhat less attention has been paid to the level, cost and structure of its overall public debt, both domestic and external.

The outstanding liabilities comprises of the Internal (Market Borrowings, RBI Treasury Bills, small savings and deposits, provident fund, reserve fund) and External liabilities. The total outstanding liability of the Government of India as per 2004-05 (BE) was nearly Rs.20 lakh crores (64% of the GDP), of which internal debt account for 97 per cent. Adding the State government’s outstanding liabilities of Rs.9.11 lakh crores the total outstanding liability exceeds the GDP (Rs.26.75 lakh crore) of 2004-05 (BE).

Another indicator that signals the seriousness on the level of indebtedness is the proportion of the Revenue deficit to the Fiscal deficit. This ratio reflects the fact that a large portion of the Fiscal deficit goes to finance public consumption expenditure pre-empting public investment.

The Revenue deficit, which constituted 49.4 percent of the fiscal deficit in 1990-91 accounted for 73.09 percent of fiscal deficit in 2003-04 (B.E). This is because of the declining trend witnessed in the Tax – GDP Ratio. At the rate 5.64% per annum during 1980-81 to 1989-90 has come down to 3.03% during 1990-91 to 1999-2000. A major part of the borrowings of the Government go to meet the current consumption expenditure. Table below indicates composition of public debt of the Central Govt. of India.

Apart from internal debt, there are also internal liabilities of the central government in the form of small savings of the public, provident funds, reserve funds & deposits of Government department. Both internal and external debts carry a burden on the economy of nation.

The Burden of Internal Public Debt

1. Internal debt trap

One of the bad effects of internal debt is the interest paid by the government. Such interest payments increase public expenditure and may become a cause for fiscal deficit. If internal public debt is not checked and kept within limits, it may take the country to the worst position called 'Internal Debt Trap'.

2. More burden on poor and weaker sections

Internal debt provides opportunities for the rich and higher middle class to earn a higher rate of interest from the state on their lending. At the same time the poor suffer a lot due to the tax burden. The government levies taxes to repay interest on public debt. But the tax burden does not necessarily fall on the rich unless it is progressive in nature. In the case of indirect taxes, the burden is felt more by the poor than the rich.

3. Increasing interest burden

Public borrowing may become costlier for the government especially when it resorts to public borrowing by issuing bonds and debentures. Such bonds and debentures carry a high rate of interest to the extent of 15 percent. The impact of such interest payments may develop manifold and still worsen in the future if the government stick to the same policy of borrowing in the years to come.

4. Unjustified transfer

The servicing of internal debt involves transfers of income from the younger to the older generations and from the active to the inactive enterprises. The government imposes taxes on enterprises and earnings from productive efforts for the benefit of the idle, inactive, old and leisurely class of bond holders. Hence work and productive risk taking efforts are penalised for the benefit of accumulated wealth. This adds to the net real burden of debts.

5. Indirect...
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