Question

Explain four types of public debt.

Mention four types of Public Debt.

Answer 1

Four types of public debt:

1. Internal and external debt: Internal debt means government 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 borrowings from abroad. The external debts are multilateral borrowings, bilateral borrowings, loans from World Bank, Asian Development Bank, etc. for various developmental programmes. Over the years, the external debt of the Central Government has increased from Rs 31,525 crores in 1990 − 91 to Rs 1,39,581 crore in 2009 − 10
2. Productive and unproductive debt: A debt is called productive if the loan is financed for the projects which bring revenue to the Government; for example, irrigation, power projects, etc. The 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, to which the loans were used.
   A debt is called unproductive if the loan is financed for war and other relief operations in case of emergency. 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 debt: A redeemable debt is one the Government repays after a fixed period of time. When the Government borrows money from the public, they sell 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 amount 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.
4. Convertible and inconvertible debt: The Government takes a loan for a specified time period at a specified interest rate, but if after some time the Government notices that there has been a fall in the market interest rate, it converts the old loan into a new loan at the lower interest rate, called a convertible loan. If it cannot be converted, it is called an inconvertible loan.