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Define public debt. Explain the types of public debt. 

Asked by Topperlearning User 24th April 2015, 7:39 AM
Answered by Expert

When the planned expenditure of the government exceeds its total revenue, the Government needs to borrow money from individuals and organisations. This is called public debt. 

The three types of public debts are:

  1. Internal and external debts: Internal debt means the government’s borrowings within the country. Individuals, banks, business firms and others are the various internal sources from which the government borrows. The various instruments of internal debt include market loans, bonds, treasury bills, ways and means, advances etc. Over the years, the internal debt of the Central Government has increased from Rs. 1,54,004 crore in 1990-91 to Rs. 23,37,682 crore in 2009-10. External debt means the government’s borrowings from abroad. The external debts are multilateral borrowings, bilateral borrowings, loans from the World Bank, the Asian Development Bank etc. It helps for various developmental programmes. Over the years, the external debt of the Central Government has increased from Rs. 31,525 crore in 1990-91 to Rs. 1,39,581 crore in 2009-10.
  2. Productive and unproductive debts: A debt is called productive if the loan is financed for projects which bring revenue to the Government; for example, irrigation, power projects etc. Productive debts are self-liquidating in nature; this means the principal amount and interest are normally paid out of the revenue generated from the projects for which the loans were used. A debt is called unproductive if the loan is financed for war and other relief operations in case of emergencies. Unproductive public loans are a net burden on the community. The government will have to resort to additional taxation for their servicing and repayment.
  3. Redeemable and irredeemable debts: A redeemable debt is that which the government repays after a fixed period of time. When the government borrows money from the public, it sells securities to the public. They pay the interest at regular intervals. When the debt matures, the public surrenders the security to the government and receives the principal along with the interest amounting anything due to them. Banks and other institutions are the holders of government securities. Irredeemable debts are the loans for which no promise is made by the government regarding their exact date of repayment. Such debt has no maturity period. The government may pay interest regularly. Normally, the government does not resort to such borrowings.
Answered by Expert 24th April 2015, 9:39 AM
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