Public Debt In India

BY: R.VASHISTHA                                                                                                                             

The term ‘Public debt’ refers to the financial liabilities of the government. Difficulties in its precise definition arise from several sources. Should this term include all financial liabilities of the ‘government’ or only some specified identified components thereof? Should it cover all tiers of government? Should it exclude inter-governmental indebtedness? Should it include financial liabilities of some public authorities or institutions, particularly those of the central bank of the country? There are no universally acceptable answers to those questions. Each country has its own legal, accounting, institutional and administrative framework for formulating answer to these questions. An estimate of public debt would depend, amongst other things, on the answers to the foregoing questions. However, in almost every case, data of public debt are compiled separately for the central government and sub-national governments. Frequently, these data are also aggregated (with or without netting for inter-governmental debt). In what follows, we shall look into broad categories of financial liabilities of both the central and state governments and briefly discuss issues related to them.

Central Government Debt

While studying GOI’s debt liabilities, the following preliminary facts are noteworthy.

·         Article 292 of the constitution allows the Government of India to borrow upon the security of the consolidated fund of India within such limits, if any, as may be fixed by parliament from time to time. GOI terms these borrowings as its ‘PUBLIC DEBT’.

·         However, there is no mention of those borrowings of the Centre which are not on the security of the consolidated Fund of India. Therefore, it is not clear whether Parliament can set limits for this category of borrowings or not. Centre does not include them in its definition of ‘Public Debt’ and terms them as ‘OTHER LIABILITIES’.

·         There is also no mention in the constitution of the guarantees that the Centre my give on the loans and other repayment obligations of third parties. But the centre has been quite liberal in giving these guarantees. They are meant to protect a wide variety of lenders (particularly institutional lenders) and investors and cover a wide variety of financial obligations such as repayment of principle and interest, dividends and performance guarantees etc. there has been a rapid increase in outstanding amount of guarantees given by GOI. From “Rs.1, 13,335 corer at the end of 2008-09, they jumped to Rs.1, 51,292 corer the end of 2010-11. These guarantees are not included in the official definitions of either ‘Public Debt’ or ‘Total Liabilities’ of GOI.

COMPOSITION

As Indicted above, financial liabilities of GOI are divided in to two parts, namely,

·         Public Debt, and

·         Other Liabilities

The distinction between these two categories has no theoretical basis. Both have similar economic effects. The stand taken by the GOI is just technical one, that is, the manner in which its liabilities are repayable. While components of ‘public debt’ are contracted on the security of Consolidated Fund of India and repayable out of it, ‘other liabilities’ are payable out of the Public account of India.

A. Public Debt

It has two parts, namely, External Debt and Internal Debt. Over time, it registered a phenomenal increase in absolute terms. From just Rs. 2,054.33 corer at the end of 1950-51, it increases to Rs. 11, 87,830 corer t the end of 2003-04 and Rs. 3,921,756 corer at the end of 2012-13.

(a) External Debt

It represents those loans which are raised by GOI from outside the country. Under our constitution, only the Centre (and not the state governments) can raise external loans. If a foreign loan is meant for a state, then the Centre borrows it and re-lends it to that state as a creditor. GOI receives external debt from several sources- bilateral, multilateral and international organizations, etc.

       Note that the external debt of GOI is not the same thing as the external debt of the country as a whole. The latter is a much eider concept and includes loans raised from abroad by non-government entities as well including, for example, items like the NRI deposits, commercial borrowings from abroad, suppliers’ credit, and other short term borrowings, etc. some of these non-government borrowings may even be guaranteed by the Government. It should also be noted that major portion of external debt of GOI is denominated in and repayable in foreign currencies.

      As proportion of Government’s total debt obligations, external debt was about 1.1% in March 1951 (Rs. 32.03 corer out of  total of Rs.2,565 corer) it rose to around 10% for some years, and was projected to be around 3.5% at end March, 2013 (Rs. 1,78,098 corer out of  total of Rs. 50,25,072 corer). However, the methodology used in estimating these figures is questionable. The figures represent book value of the outstanding debt, estimated by using the rate of exchange prevalent at the time of contracting respective loans and after netting the repayments made at current exchange rates. Therefore, by its very nature, the figure for external debt is grossly under-estimated.

(b) Internal Debt

It represents loans raised from within the country and repayable out of the Consolidated Fund of India. It comprises loans raised in the open market, special securities converted into marketable securities, other special securities issued to the Reserve Bank, compensation and other bonds and securities, borrowings through  variety of treasury bills, as also non- negotiable, non-interest bearing rupee securities issued to international financial institutions. In addition, since April 2004, the GOI issue, as per need and in consultation with RBI, treasury bills and /or dated securities to RBI for absorbing excess liquidity arising largely from inflow of foreign exchange. The scheme under which this is done is known as ‘Market stabilization Scheme’ Borrowings under this head were budgeted at Rs. 20,000 corer during 2012-13.

Internal debt of GOI increased at a rapid rate for several reasons. From a modest figure of just Rs. 2,022 corer at the end of 1950-51, it increased to Rs. 11, 41,706 corers by the end of 2003-04, and was budgeted to touch Rs. 37, 43,858 corers by the end of Rs. 2012-13. As a proportion of total liabilities of GOI, the corresponding figures were 78.8%, 65.8% and 74.5% respectively. it has the following main components.

(i)                  Market loans. : - They are variously called term loans, dated loans, funded loans and permanent loans. They have maturity of 12 months or longer t the time of issue. Till 1992-93, each market lone carried fixed ‘coupon ’(i.e., the percentage rate of  periodic interest payment). However, from 1992-93 onwards, several now combinations of yield, maturity, methods of issue (sale) redemption have been experimented with tried so as to broaden the market for GOI securities and bring them closer to market conditions. Thus, in addition to the above-mentioned securities with fixed coupon rates and maturities, prominent new varieties introduced since 1992-93 include Zero Coupon Bonds, Parity Paid Stock Floating Rate Bonds and Capital Indexed Bonds. Features of each verity were selected to cater to the special needs of potential creditors while ensuring that terms and conditions of the loans were also fair to the authorities. Similarly, amongst new methods of issue (sale) of bonds, mention may be made of ‘Auctions’, ‘On Tap Issue’, ‘Parity Placement’, and ‘Private Placement’ etc. some issues had the features of even ‘call’ (the government having the option to buy back issued securities before maturity ) and ‘put’(the buyers having the option of selling back to the government before maturity) options. It my be noted that Capital Indexed Bonds were meant to protect the investors from inflation by providing  a coupon of 6% over the rate of increase in wholesale price index and by increasing their redemption value in tune with percentage increase in wholesale price index. Similarly the coupon on floating rate bonds was periodically revised by adding a fixed percentage to a selected benchmark (such as average yield on 364- day treasury bills). The experimenting process is still on and the features of market loans are yet to assume a final pattern. Market loans were budgeted to be 59.5% (Rs. 29 ,87,447 corer) of GOI total debt liabilities (Rs. 50,25,072 corers) at the end of 2012-13.

Some market loans result from ‘funding’ operations (that is, conversion of shorter term obligations like Treasury Bills into longer-term or ‘dated’ ones). Still others may be ‘in the course of repayment’. Almost all dated loans re marketable (that is, salable by the original buyer to others) though some non-marketable loans may be specially created and lodged with RBI.

              Maturity wise, market loans may be divided into ‘non terminable’ and ‘terminable’ ones. The principle amount of non-terminable lone is not repayable. Only a periodic interest amount is payable. Currently, this category is non-existent in India. Maturity of terminable loans ranges between three to thirty years t the time of issue and is normally ‘tailored’ to suit the need of creditors and thus ensure ‘successful’ flotation of fresh loans.

(ii)                 Special securities converted into marketable securities:-  In pursuance of its policy to help various institutions, GOI has been issuing special securities to financial institutions namely, nationalized banks, state bank of India, IIBI, IFCI, and UTI and occasionally converting them into marketable securities. Their outstanding figure has been quite significant. It stayed t Rs. 76,818 corer from 2009-10 to 2012-13

(iii)               Other special securities issued to RBI:- Compared with other debt obligation of GOI, this item represents  small amount and has stayed t Rs. 1,489 corer since 2005-06.

(iv)              Compensation and other bonds:- These obligations emerged on account of various policy measures on the part of GOI. From a peak of Rs. 72,760 corer in 2005-06, they registered downtrend and were budgeted at Rs. 15,138 corer in 2012-13.

(v)                Treasury bills: - Normally, they are issued at a discount and are redeemed at par. Till 1988-89, these bills had maturity of only 13 weeks. In 1988-89, bills of 182-days maturity were also introduced, but were replaced by 364-days bills in 1992-93. In 1997-98, 14-days bills were introduced and 182-days bills reappeared on the scene in 1999-2000. Thus currently, these bills have maturities of 14days, 91days, 182 days and 364 days. Their outstanding amount has been increasing rapidly in line with budgetary deficits of the centre in spite of their huge periodic ‘funding’. The revised estimates for March end 2012 and budgeted figure for March end 2013 were placed at Rs. 3, 54,052 corer and Rs. 3, 63,052 corers respectively. In 2012-13, these bills accounted for 9.7% of internal debt of GOI. Note that these figures do not include treasury bills held by the RBI under ‘Market Stabilization Scheme’. It should also be noted that ’91-days Treasury Bills funded into special securities’’ and ‘Other special securities issued to RBI’ are held by RBI and it cannot resell them in the market. It is noteworthy that official definition of budgetary deficit includes only a part of 91-dys bills (that is, only the ad hoc ones¹). However, this concept of budgetary deficit lost its relevance in 1997-98 when the center adopted a policy of borrowing through ‘ways and means advances’ instead of through ad hoc treasury bills².

(vi)              Ways and mean advnces: - This item represents very short term borrowings from the RBI for meeting transient shortage of cash. It s expected that these advances would not spill over to the next financial year so that year-end outstanding balances would be nil.

(vii)             Securities issued to international financial institutions: - As a member of some international financial obligations, GOI is committed to meet its share of concomitant financial obligations. For this purpose, it issues special securities and lodges them with the RBI which, in turn, makes necessary payments on behalf of GOI. After remaining more or less stagnant for several years, the outstanding amount of these securities registered moderate increase in 2010-11 and major jump in 2012-13, touching Rs. 70,333 corer or 1.9% of internal debt.

(viii)           Securities against small savings: - Receipts of all small savings lent directly or indirectly to the government with the exception of State Provident Funds, Saving Deposits, Saving Certificates and Public Provident Funds, are listed under this item. Over the last few years, outstanding balances in this item have tended to be stagnant. The budgeted figure for 2012-13 was Rs. 2, 09,380 corers (5.6% of internal debt).  

B. Other liabilities

This category covers a variety of financial liabilities of the centre. Recall that these liabilities are not contracted on the security of the consolidated fund of India which means that they are not redeemed out of the future revenue earnings of the GOI. Instead, they are repayable out of the Public account of India. And in view of this legal position, the GOI does not include them in the definition of its ‘Public Debt’ through their economic effects are similar to those of the officially defined Public debt. These liabilities increased from Rs. 811.07 corers at the end of 1950-51 to budgeted figure of Rs. 11, 03,616 corers at the end of 2012-13, constituting around 22% of GOI’s total liabilities. Their terms and conditions as also their yield rates are frequently revised in line with changing market conditions. This section of GOI debt obligations includes the following:

(i)                  National small savings Fund: - NSSF was created within Public account of Indi a in 1999-2000 to tackle the problem of increasing indebtedness of states to the Centre. Instead of GOI receiving all small savings as loans and relending them to the states, some of them (namely, Savings Deposits, Saving Certificates And Public Provident Funds) are now first credited to the NSSF and it, in turn, invests them in central and state securities in pre-determined proportions as decided from time to time. Currently, 80% of its net collections are being invested in state securities and the remaining 20% in GOI securities. Outstanding liabilities of GOI towards NSSF were budgeted at Rs. 5, 62,614 corer (51% of total other liabilities) by the end of 2012-13.

(ii)                State provident funds: - The figure of State Provident Funds increased from a mere Rs.95 corer in 1950-51 to Rs. 1, 19,420 corers in March 2012 that is about 11.1% of Other Liabilities.

(iii)               Other Accounts: - this category comprises two sub-components. Special securities in lieu of cash subsidies issued to Oil Marketing Companies, Fertilizers Companies, and Food Corporation of India comprise the first part. The second part comprises miscellaneous items and is entitled ‘Other Items’. Outstanding figure of ‘Other Accounts’ was budgeted at Rs. 2, 71,971 corers at the end of 2012-13 (26.6% of total other liabilities).

(iv)              Reserve Funds and Deposits: - This category comprises both interest-bearing and interest-free accretions. Interest bearing component includes Deposit Schemes for Retiring Government Employees, Deposit Scheme for Retiring Employees of Public Sector Companies, Special Deposits Schemes, Railway Reserve Funds and Post Office Funds etc. the share of ‘Reserve Funds and Deposits’ in ‘Other Liabilities’ has shown  a fall from 45% in March 1951 to bout 12.2% in March 2013 (Rs. 1,35,084 corer).

DEBT OF STATE GOVERNMENTS

Like the Centre, the state governments also have a variety of debt obligations. They can borrow under Article 293 of the constitution upon the security of their respective Consolidated Funds.  A State can borrow only from within the territory of India. It can also borrow from the centre. But if it is already indebted to the centre, or if a lone guaranteed by the Central Government is not fully repaid, then the Centre can impose any conditions it deems fit for fresh loans to be borrowed by that state. Factually speaking, no state can ever hope to be free from this bondage. In addition, a state legislature may impose limits from time to time within which the Government of state can borrow or can give guarantees. As in the case of the Centre, most states have enacted FRBM (fiscal responsibility and budget management) legislative involving self-imposed time-bound fiscal targets. Such a legislation is also pre-condition for a state to earn eligibility for participation in debt-swapping scheme of the centre which is meant to provide them a relief in their indebtedness to the centre.

Currently, state loans re classified s follows:

1.       Internal Debt

(a)    Market Loans

(b)    Compensation and Other Bonds.

(c)     Special Securities Issued to NSSF (National Small Savings Fund)

(d)    Ways and means advances from the RBI.

(e)    Loans and Advances from Banks and Other Financial Institutions.

2.       Loans and Advances from the Central Government

3.       Provident Funds, etc.

Internal Debt

(i)                  The proportion of ‘Internal Debt’ in the ‘Total Debt’ registered continuous downtrend till the time NSSF came into existence. This proportion was 18.3% at the end of 1960-61 and had declined to 15.0% by the end of 1990-91. However, within a few months of the creation of NSSF (that is, end of 1999-2000), this proportion had risen to 24.8%, and by the end of 2011-12, was budgeted t 67.4%.

(ii)                As recommended by the FC-XII, the Centre stopped giving loans to the states (except in the case of externally aided state projects). Consequently, dependence of states on direct market borrowings increased rapidly with all its associated merits and demerits. On the one hand, this has generated uncertainties of availability and cost of lone funds, and on the other, the states can take advantage of favorable market conditions, and adjust their borrowings as per their needs. increasing dependence of states on market borrowings is reflected in increasing share of ‘Market Loans’ in their ‘Total Debt’ obligations from 20.0% in 2006-07 to 37.1% in 2011-12. This is in sharp contrast with correspondingly negligible proportions of ‘Compensation and Other Bonds’.

(iii)               Creation of NSSF at the turn of the century is a landmark in the history of public debt of states. By the end of 2011-12, ‘special securities issued to NSSF’ were budgeted to reach Rs. 5121.3 billion and 25.5% of ‘Total Debt’. It has become major source of loan funds for the states.

(iv)              Dependence of states on ways and means advances from the RBI is, by their nature, extremely limited. There have been no such advances for the last several years. At the same time, loans from banks and financial institutions are hovering round 5%.

Loans and advances from GOI

              Till the creation of NSSF, GOI was the biggest source of loan fund to state, accounting for 70-75% of their ‘Total Debt’. This proportion registered an immediate fall with the introduction of the policy of liberalization. This decline was further strengthened with the creation of NSSF and by 2011-12 it was budgeted at just 7.8%.

Provident funds etc.

             This category comprises provident funds, small savings, reserve funds, deposits and advances. Their proportionate share has been sufficiently stable at round a quarter of the total debt of the states.