Page 140 - DMGT401Business Environment

Unit 6: Fiscal Policy

4. Obligations owed to foreigners – government institutions, firms and individuals are Notes
called external loans.

Debt obligations of the Central Government are broadly divided into two categories:
1. Internal debt: This includes loans raised within the country, like: (a) Current market
loans, (b) others, comprising balance of expired loans, compensation and other bonds
such as National Rural Development Bonds and Capital Investment Bonds (c) Special
Bearer Bonds (d) Treasury Bills (e) Special floating and other loans (f) Special securities
issued to the RBI (g) Small savings (h) Provident funds (i) other accounts (j) reserve funds
and deposits.
2. External Debt: External debt is raised in foreign currency and a substantial part of it is also
repayable in foreign currency. External debt represents loans raised by a country from
outside sources and includes debt raised by the government and by non-government
sources such as NRI deposits, commercial borrowings from abroad, suppliers' credit and
short-term borrowings, etc.

Notes Public debt in India has grown immensely during the planning period. In 1999, the
total debt of the Central Government was 8,75,925 and in 1998 the debt of the State
Government stood 2,84,942. In the budget of 2005-2006, 22% of the total expenditure was
only interest payment. If the debt is owned by the Central Bank of India it increases
inflation as the RBI meets the growing demand by issuing additional quantity of money.

Public debt plays an important role in the economy. Public debt contributes to the saving efforts
in the economy. LDCs are usually short of capital resources. As the saving capacity of the masses
is very low, appropriate measures have to be taken to step up rates of saving and investment in
the economy. The net effect of the borrowings also depends upon the sources from which they
come:
1. If the government reduces it's the borrowings from the market, and the public reduces its
own consumption and lends its savings to the government, the result will be a net increase
in the rate of savings. But if loans are given to the government by diverting savings from
private investment, then there will be no net increase in savings and investment activity.
But even after that, public loans can help economic growth by reallocation of resources.

2. If money is borrowed from the central bank it results in an addition to aggregate money
supply in the country. This results in increment in demand and an upward pressure on
prices.

Deficit Financing
Deficit Financing can be defined as "the financing of deliberately created gap between public
revenue and public expenditure or a budgetary deficit, the method of financing resorted to
being borrowing of a type that results in a net addition to national outlay or aggregate
expenditure." Therefore, we can say it is deliberate unbalancing of the budget in such a way that
government expenditure exceeds government revenue. In India, great reliance has been placed
on deficit financing for mobilising resources for the plans. Deficit financing has been explained
in different ways:
Revenue Deficit: Revenue Deficit = Revenue Expenditure – Revenue Receipts.
Budget Deficit: Budget Deficit = Total Expenditure – Total Receipts.

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