Introduction
Public debt refers to the total borrowing of a government through instruments like bonds, loans, and securities to finance expenditures that exceed its revenues. It is a crucial component of fiscal policy used for stimulating economic growth, especially during downturns.
However, if not managed responsibly, public debt can lead to economic vulnerabilities such as inflation, high interest rates, and reduced fiscal freedom. The challenge lies in striking a balance — using debt for productive investment without compromising long-term sustainability.
What Is Public Debt?
Public debt, also known as government debt or sovereign debt, is the accumulation of money that a government owes to external lenders and domestic creditors.
Types of Public Debt
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Internal Debt: Borrowed from domestic institutions like banks, RBI, and citizens.
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External Debt: Borrowed from foreign governments, multilateral institutions (IMF, World Bank), or foreign investors.
Classification by Duration
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Short-term debt (less than 1 year)
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Medium-term debt
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Long-term debt
Why Do Governments Borrow?
1. To Fund Budget Deficits
When government expenditure exceeds its revenue, it borrows to bridge the fiscal gap.
2. For Infrastructure and Development Projects
Investments in roads, railways, power, and water supply often require upfront capital, funded by debt.
3. To Counter Economic Slowdowns
During recessions, governments use borrowing to boost demand via increased public spending.
4. To Meet Emergency Needs
Natural disasters, pandemics, or wars often compel governments to borrow extensively.
Positive Effects of Public Debt
1. Stimulates Economic Growth
When used for productive capital formation, such as infrastructure or education, public debt can increase GDP, employment, and long-term income.
2. Enables Counter-Cyclical Spending
Public borrowing allows governments to spend more during economic downturns, smoothing out business cycles and reducing the risk of recessions.
3. Attracts Investment
Government bonds often serve as safe investment avenues, helping deepen financial markets and attract foreign institutional investors.
4. Encourages Infrastructure Modernization
India’s debt-financed projects like Bharatmala, Sagarmala, and PM Gati Shakti are transforming connectivity and logistics.
Negative Effects of Public Debt
1. Interest Burden on Future Budgets
Debt comes with interest obligations, which may reduce fiscal space for welfare and development spending.
India spends around 20% of its budget on interest payments, which limits its policy flexibility.
2. Crowding Out Private Investment
High government borrowing from domestic markets can lead to higher interest rates, making borrowing costly for businesses.
3. Inflationary Pressures
If debt is monetized (i.e., funded by printing money), it can lead to demand-pull inflation.
4. Risk of Debt Trap
When a country borrows to repay previous debt or just to meet interest obligations, it risks entering a debt trap, particularly when GDP growth is slow.
5. Reduced Sovereign Ratings
High public debt can affect a country’s credit rating, raising borrowing costs and discouraging foreign investment.
India’s Public Debt Profile
Current Scenario (As of FY2025)
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India’s general government debt is around 82% of GDP (including state and central governments).
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Out of this, the Centre accounts for ~58%, and States for ~24%.
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The majority is internal debt, with external debt forming a small share.
Major Sources of Borrowing
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Market loans (G-secs, T-bills)
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National Small Savings Fund (NSSF)
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External assistance from multilateral agencies
Debt Sustainability
According to the RBI and IMF, India’s debt is manageable due to its strong nominal GDP growth and large domestic investor base.
However, fiscal consolidation is necessary to keep debt within sustainable limits.
Public Debt vs Economic Growth
1. The Debt-Growth Trade-off
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Moderate levels of debt, when used efficiently, boost growth by funding high-impact sectors.
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But beyond a certain point (often cited as 60–70% of GDP), additional debt has diminishing returns and may harm growth.
2. Empirical Evidence
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Countries like Japan manage high debt levels due to low interest rates and investor confidence.
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In contrast, countries like Sri Lanka defaulted due to high external debt and weak fiscal capacity.
3. India's Fiscal Strategy
India’s Fiscal Responsibility and Budget Management (FRBM) Act recommends reducing the fiscal deficit and public debt to sustainable levels.
However, this has often been deferred during crises like the 2008 global recession and COVID-19 pandemic.
Policy Measures for Debt Management
1. Fiscal Consolidation
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Improve tax-to-GDP ratio
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Rationalize subsidies
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Disinvest underperforming PSUs
2. Productive Use of Borrowed Funds
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Prioritize capital over revenue expenditure
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Invest in sectors with high economic multipliers
3. Promote Economic Growth
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Higher GDP growth improves the debt-to-GDP ratio
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Supports better repayment capacity and creditworthiness
4. Transparent Borrowing Practices
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Publish debt data regularly
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Strengthen institutions like the Public Debt Management Agency (PDMA)
Conclusion
Public debt is neither inherently good nor bad. Its impact depends on how wisely and productively it is used. For developing economies like India, responsible borrowing can drive inclusive growth, modernize infrastructure, and combat unemployment.
However, when debt grows unchecked and is used for unproductive purposes, it burdens future generations, triggers inflation, and limits the government's ability to respond to crises.
The key lies in maintaining a sustainable debt level, improving revenue generation, and ensuring every borrowed rupee is spent with efficiency, accountability, and long-term economic vision.