Public Debt

Subject: Economy | Unit: Fiscal Policy | Topic: Public Debt Exam: AP Group 2 (APPSC)

Introduction

Public debt is the total borrowing of the government from domestic and external sources. It is the cumulative result of fiscal deficits over the years and represents the government's obligation to repay principal and interest. India's central government outstanding liabilities stood at Rs 197.18 lakh crore (2025-26 RE) with a debt-to-GDP ratio of 56.1%. The government targets reducing this to 50% by March 2031. Interest payments on this debt consume 25% of total expenditure — the single largest expenditure item. Understanding debt concepts, sustainability conditions, and the FRBM framework is critical for AP Group 2.

Economic Context

Government borrowing serves multiple purposes: financing capital expenditure on infrastructure, bridging revenue shortfalls, and managing cash flow mismatches. While moderate borrowing supports growth, excessive debt can lead to a "debt trap" where the government borrows merely to pay interest on past debt. India's debt composition is primarily internal (96.59%) with external debt at only 3.41%, which is a position of relative strength. The debt-to-GDP ratio has been declining from 57.1% (FY 2024-25) to 56.1% (FY 2025-26), targeting 50% by 2031.

Core Content

Types of Public Debt

Components of Internal Debt

Components of External Debt

India's Debt — Latest Figures

External Debt Position

Debt-Related Formulas

Fiscal Deficit = Total Expenditure - Total Receipts (excluding borrowings) = Total Borrowing
Primary Deficit = Fiscal Deficit - Interest Payments
If Primary Deficit = 0: Government borrows ONLY to pay interest on past debt

Key Debt Concepts

FRBM Framework

Types of Government Securities

AP Connection

• AP's outstanding liabilities: 36% of GSDP (2026-27 budget) — within manageable limits and below the national average
• AP fiscal deficit: improving from 4.4% (2025-26) to 3.8% (2026-27) of GSDP
• AP capital outlay increased 47% to Rs 48,698 crore — financed partly through market borrowings (SDLs)
• AP receives revenue deficit grants from Centre per 15th Finance Commission
• Post-bifurcation (2014): AP inherited significant debt and lost Hyderabad's revenue base
• State's borrowing finances critical projects: Polavaram (Rs 6,105 crore), Amaravati (Rs 6,000 crore)
• AP demanded Special Category Status partly to access additional central grants and reduce debt burden
• Interest payments consume a significant portion of AP's revenue receipts, mirroring the national pattern

Key Points Summary

1. Public debt = total government borrowings (internal + external)
2. Article 292: Centre borrows on Consolidated Fund security; Article 293: States borrow only within India
3. Internal debt is 96.59% of India's total public debt; external only 3.41%
4. Market loans (G-Secs) are the largest component of internal debt
5. JICA (Japan) is the largest bilateral lender to India
6. Central Government outstanding liabilities: Rs 197.18 lakh crore (2025-26 RE)
7. Debt-to-GDP ratio: 56.1% (Centre); target 50% by March 2031
8. General Government (Centre+States) debt-to-GDP: ~82-83%
9. External debt: ~$747 billion; external debt-to-GDP ~18-19%
10. Forex reserves cover 80-90% of external debt
11. Interest payments: 25% of total expenditure, 37% of revenue receipts — largest single item
12. Primary Deficit = Fiscal Deficit - Interest Payments; if zero, borrowing only for interest
13. Crowding out: excessive govt borrowing raises interest rates, reduces private investment
14. Domar Condition: if growth rate > interest rate, debt-to-GDP stabilizes
15. Debt monetization = RBI buying govt bonds = printing money = inflationary
16. N.K. Singh Committee: Centre debt 40% of GDP, States 20%
17. SGBs: denominated in gold grams with 2.5% annual interest

Exam Strategy

Key Terms Glossary