What is Public debt ? India’s high public debt & its impacts :

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July 9, 2024

What is Public debt ? India’s high public debt & its impacts :

What is Public Debt?

Public debt, also referred to as government debt or national debt, is the total amount of money a government owes to its creditors. It’s essentially money borrowed by the government to cover spending that exceeds its income (tax revenue and other income sources).

Concept: The government borrows money by issuing bonds and bills to investors. This money can be used to finance various expenditures, like social programs, infrastructure projects, or economic stimulus during a recession.

Types: Public debt can be categorized into internal debt (borrowed from domestic sources like banks and citizens) and external debt (borrowed from foreign lenders).

India’s high public debt poses significant challenges and implications for its welfare schemes and overall economic stability.

High Public Debt in India:

India’s public debt has been increasing over the years, driven by various factors such as fiscal deficits, high expenditure on subsidies, welfare schemes, defense, and infrastructure projects. The COVID-19 pandemic exacerbated the situation, leading to increased borrowing to support the economy during the downturn.

Effects on Welfare Schemes:

  1. Resource Allocation:

Constraint on Spending: High debt levels can constrain government spending on welfare schemes as more funds are diverted towards interest payments and debt servicing. This can limit the resources available for social programs like healthcare, education, and poverty alleviation.

Prioritization: The government may need to prioritize debt repayment over welfare spending, potentially leading to cuts or underfunding of crucial welfare programs.

  1. Fiscal Deficit and Inflation:

Inflationary Pressures: High public debt can contribute to higher fiscal deficits, which might lead to inflation. Inflation can erode the purchasing power of citizens, particularly affecting the poor and marginalized communities who rely heavily on welfare schemes.

Reduced Real Benefits: Inflation can reduce the real value of benefits provided under welfare schemes, diminishing their effectiveness and impact on improving living standards.

  1. Investor Confidence and Economic Stability:

Interest Rates: High public debt can lead to higher interest rates as the government competes with the private sector for borrowing. Increased interest rates can slow down economic growth, indirectly affecting the funding and success of welfare programs.

Economic Stability: Concerns about high public debt can affect investor confidence, leading to reduced investment in the economy. A slower economy can result in lower tax revenues, further limiting the government’s ability to finance welfare schemes.

  1. Dependency on External Borrowing:

Vulnerability to External Shocks: Reliance on external borrowing to manage high public debt can make the country vulnerable to global financial market fluctuations and exchange rate volatility. This can affect the government’s ability to maintain consistent funding for welfare programs.

Mitigation Strategies

  1. Improving Tax Collection: Enhancing tax compliance and broadening the tax base can increase government revenues, reducing the need for excessive borrowing and providing more funds for welfare schemes.
  2. Expenditure Management: Rationalizing subsidies, improving efficiency in government spending, and targeting welfare schemes more effectively can help in better allocation of resources.
  3. Structural Reforms: Implementing structural reforms to boost economic growth can increase government revenues over the long term, allowing for sustainable funding of welfare programs.
  4. Debt Management: Developing a comprehensive debt management strategy to manage and reduce public debt over time can help in ensuring fiscal sustainability and maintaining the capacity to fund welfare schemes.

In summary, while high public debt in India poses challenges for funding welfare schemes, effective fiscal management, structural reforms, and improved tax collection can help mitigate these effects and ensure sustainable development and social welfare.

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What is Public debt ? India’s high public debt & its impacts : | Vaid ICS Institute