Indian Debt Management


Piyali Sengupta


Hidayatullah National Law University, Raipur




This paper deals with quite debated topic i.e. Indian Debt Management. Management of debts has always been a troublesome job for the economists since Independence. The first part of the paper deals with meaning and types of Public debt in India. Subsequently the paper talks about the sources of both external debts and internal debts. The third part of the paper analyses the debt position of India and debt trap.


Subsequently, the trend in debts and liabilities has been focused upon. Finally, the methods of redemption of debt have been discussed in detail.




Debt management has over the years become a specialist job and administrations the world over have resorted to branching this activity under a separate authority. Presently, the Reserve Bank of India carries out both the debt management and the monetary policy implementation functions, for the central government. Therefore, a case for a separate DMO is being made out mainly on the ground that the central bank is conflicted when it acts both as the government's banker trying to borrow as cheap as possible, and also as the prime authority responsible to enforce the monetary policy with the prevalent interest rates.


Another factor to consider is India's debt rating that is just about investment grade or thereabouts. A dedicated approach towards debt management will help in improving the disappointing debt rating. With the Indian government taking on its biggest public debt raising exercise till date of approximately close to $ 90 billion or Rs 4.5 lakh crores, the presence of a vibrant and dynamic debt has become paramount. Due to the severe global credit crisis, the Indian government, like most other governments the world over, was pushed to walk the path of an expansionary fiscal policy.


Therefore, the need for a sound public debt management strategy has become even more pressing. It is the need of the time to lower the cost of public borrowing, while balancing it with extant monetary policy initiatives and refinancing risks inherent in any government borrowing plan.



This project on Indian Debt Management is a descriptive research. Secondary sources have been referred to and electronic sources have been used at large to gather information about the topic.


Books and other references as guided by the faculty have been useful in giving this project its basic structure and details. Websites, article and dictionaries have also been used. Footnotes have been provided wherever needed to acknowledge the source of information.




The present monetary policy in India is, to an extent, unable to cope up with the debts that borrowed by India; whether external and internal and hence needs to be improvised to a larger extent.



It can be referred from the tables and data provided that the external debt of the country as a percent of total debt has remained constant in the period between 2009-1010 to 2010-2011, which is a very good sign. Although there is increase in the amount of debts but the positive aspect is that the external debt has decreased to a larger extent that can be inferred from the graph.



At the outset, the author would like to thank to her teacher Ms. Eritriya Roy and the entire Economics faculty, HNLU for helping and guiding her in completing this article. She would also like to express her gratitude to her parents and friends for their support and help.


Author’s gratitude also goes out to the staff and administration of HNLU for the infrastructure in the form of library and IT Lab that was a source of great help for the completion of this project.


Meaning and types of Public Debt in India

Meaning of public debt in India

Public debt refers to the borrowings of the Government from individuals, banks, financial institutions,  organizations and foreign countries. When the public expenditure exceeds public  revenue, the government resorts to borrowings. Thus, public debt is used to cover fiscal deficit. The public debt has increased by 13.4 times between 1990-91 and 2009-2010.1 In short, public debt in Indian context refers to the borrowings of the Central and State governments.2


Types of public debt

Government loans are of different kinds, they may differ in respect of time of repayment, the purpose, conditions of repayment, method of covering liability. Thus the debt may be classified into following types.


1. Productive and Unproductive debts

i. Productive debt: Public debt is said to be productive when it is raised for productive purposes and is used to add to the productive capacity of the economy. Productive debts are those which are fully covered by assets of equal or greater value. These debts are those which if taken have surety of repayments in the future.



Like, if the borrowed money is invested in the construction of railways, irrigation projects, power generations, etc. It adds to the productive capacity of the economy and also provides a continuous flow of income to the government. The interest and principal amount is generally paid out of income earned by the government from these projects.


Productive loans are self liquidating. Generally, such loans should be repaid within the lifetime of property. Thus, such loan does not cause any net burden on the community.


ii. Unproductive debt: Unproductive debts are those which do not add to the productive capacity of the economy. They do not have the surety of repayment in the near future. Unproductive debts are not necessarily self liquidating. The interest and the principal amount may have to be paid from other sources of revenue, generally from taxation, and therefore, such debts are a burden on the community. Like, public debt used for war, famine relief, social services, etc. is considered as unproductive debt.


However, such expenditures are not always bad because they may lead to well being of the community. But such loans are a net burden on the community since they are repaid generally through additional taxes.


2. Voluntary and Compulsory Debt

i. Voluntary debt: These loans are provided by the members of the public on voluntary basis. Most of the loans obtained by the government are voluntary in nature. The voluntary debt may be obtained in the form of market loans, bonds, etc. It does not have a selfish interest. It is just done out of one’s own self-interest. The Government makes an announcement in the media to obtain such loans. The rate of interest is normally higher than that of compulsory debt, in order to induce the people to provide loans to the government.


ii. Compulsory debt: A compulsory debt is a rare phenomenon in modern public finance unless there are some special circumstances like war or crisis. The rate of interest on such loans may be low. Considering the compulsion aspect; these loans are similar to tax, the only difference is that loans are rapid but tax is not. In India, compulsory deposit scheme is an example of compulsory debt.


3. Internal and External Debt

i. Internal debt: The government borrows funds from internal and external sources. Internal debt refers to the funds borrowed by the government from various sources within the country.


The various internal sources from which the government borrows include individuals, banks, business firms, and others. The various instruments of internal debt include market loans, bonds, treasury bills, ways and means advances, etc. Internal debt is repayable only in domestic currency. It results in the redistribution of income and wealth within the country and therefore it has no direct money burden.


ii. External debt: External loans are raised from foreign countries or international institutions. These loans are repayable in foreign currencies. External loans help to take up various developmental programmes in developing and underdeveloped countries. These loans are usually voluntary.


An external loan involves, initially a transfer of resources from foreign countries to the domestic country but when interest and principal amount are being repaid a transfer of resources takes place in the reverse direction.


4. Short-Term, Medium-Term and Long-Term Debts

i. Short-Term debt: Short term debt matures within a duration of 3 to 9 months. Generally, rate of interest is low. For instance, in India, Treasury Bills of 91 days and 182 days are examples of short term debts incurred to cover temporary shortages of funds. The treasury bills of government of India, which usually have a maturity period of 90 days, are the best examples of short term loans. Interest rates are generally low on such loans.


ii. Medium-Term debt: Long term debt has a maturity period of ten years or more. Generally the rate of interest is high. Such loans are raised for developmental programmes and to meet other long term needs of public authorities.


iii. Long-Term debt:  The Government may borrow funds for medium term needs. These funds can be used for development and non development activities. The period of medium term debt is normally for a period above one year and up to 5 years. One of the main forms of medium term debt is by way of market loans.


5. Redeemable and Irredeemable Debts

i. Redeemable debt: The debt which the government promises to pay off at some future date are called redeemable debts. Most of the debt is redeemable in nature. There is certain maturity period of the debt. The government has to make arrangement to repay the principal and the interest on the due date.


ii. Irredeemable debt: Such debt has no maturity period. In this case, the government may pay the interest regularly, but the repayment date of the principal amount is not fixed. Irredeemable debt is also called as perpetual debt. Normally, the government does not resort to such borrowings.


6. Funded and Unfunded Debts

i. Funded debt: Funded debt is repayable after a long period of time. The period may be 30 years or more. Funded debt has an obligation to pay fixed sum of interest subject to an option to the government to repay the principal. The government may repay it even before the maturity if market conditions are favourable. Funded debt is Undertaken for meeting more permanent needs, say building up economic and industrial infrastructure. The government usually establishes a separate fund to repay this debt. Money is credited by the government into this fund and debt is repaid on maturity out of this fund.


ii. Unfunded debt: Unfunded debts are incurred to meet temporary needs of the governments. In such debts duration is comparatively short say a year. The rate of interest on unfunded debt is very low. Unfunded debt has an obligation to pay at due date with interest.


Sources and India’s Internal and External debt

India’s external debt 2010-2011, 2009-2010

External debt refers to the liabilities of the Indian Government, public sector, private sector and financial institutions to overseas parties. The government of India has raised foreign loans from U.S.A, U.K, France, U.S.S.R, Japan, etc.


It has two types -external and domestic.  On the domestic front it includes resources for financing Five-year plans, foreign aid for technological assistance to carry out different development projects etc. External long term debt includes loans from World Bank, various commercial borrowings, bilateral borrowings etc.


It is to be noted that the overall external debt of India comprises of Government debt and Non-government debt. The Government debt is owed by Government authorities, both Central and State Governments, whereas the non-Government debt is owed by private parties in India. In terms of composition, India's external debt has shifted in favour of private debt over the last decade.3


According to World Bank’s publication titled Global Development Finance 2009, India was fifth most indebted country in terms of stock of external debt.


India’s internal debt

The internal debt is a major component of public debt of the central government of India. The following are the various components of internal debt.4


1. Market Loan-These have a maturity period of 12 months or more at the time of issue and are generally interest bearing. The government issues such loans almost every year. These loans are raised in the open market by sale of securities or otherwise.


2. Bonds-The Government borrows funds by way of issue of bonds. The government obtains funds through the issue of bonds such as National Rural Development Bonds, Central Investment Bonds. The bonds are issued at different maturity periods, which may range from 3 years to 10 years period. They provide medium-term to long-term funds to the government.


3. Treasury Bills- They are a major source of short-term funds for the government to bridge the gap beyween revenue and expenditure5. At present, government issues 91 day and 364 day treasury bills. The treasury bills are purchased by commercial banks and others. The amount of debt as a result of 91 day Treasury bills has increased from Rs. 30,371 crores in 2007-08 to Rs. 74,091 crores as at the end of March 2006. They are auctioned by the RBI of regular intervals and issued at a discount to face value. The government issues  91 day, 182 day and 364 day treasury Bills.6


4. Special Floating and Other Loans -These represents India's contribution towards share capital of international financial institutions like IMF, World Bank, International Development Agency and so on. These are non-negotiable and non-interest bearing securities. The Government of India is liable to pay the amount at the call of these institutions. Accordingly, it is a short-term debt upon the Government of India


5. Special securities issued by RBI- The government obtains temporary loans for a period of maximum 12 months from RBI and issues special securities, which are non-negotiable and non-interest bearing. Such securities provide short term funds to the Government.


Debt trap and Debt position of Central Government

An incentive structure that lures individuals into accepting long-term debt obligations under conditions that strongly favor the lender. Victims of debt traps are often prevented from discharging the debt through techniques such as unusually high or variable interest rates, changing payment plans, and unreasonably high penalties for late payments.7


India had a mammoth external debt of $83.8 billion outstanding at end March 1991 and this rose to $224.6 billion at end-March 2009. The total debt as a percent of GDP rose to as high as 28.7 percent in 1990-91 while debt service ratio(debt service payment as a percent of current receipts) was as high as 35.3 . India was moving rapidly towards an external debt trap during that time when almost half the export earnings were required only for debt servicing.8


Debt position of central government

The overall debt for Government of India includes debt and liabilities contracted in the Consolidated Fund of India (technically defined as Public Debt) as well as liabilities in Public Account. Major proportion of overall debt of the Central Government at the end of March 2011 was domestic debt which is at 92.1 per cent and external debt is 7.94 per cent as on March 2011. While public debt accounts for 83.4 per cent of Central Government’s debt and liabilities; public account constitutes the balance of 16.6 per cent at the end of March 2011. Country’s reliance on domestic debt has further increased as may be seen from external debt as percentage of GDP going down from 3.9 per cent in 2009-10 to 3.6 per cent in 2010-11.9


Debt - external (Billion US$) of India            








Definition of external Debt -: This entry gives the total public and private debt owed to nonresidents repayable in foreign currency, goods, or services. These figures are calculated on an exchange rate basis, i.e., not in purchasing power parity (PPP) terms.10


Debt Position of Central Government


Components of debt




Public debt




Internal debt




External debt




Components of debt (as % of debt)


Components of debt




Public debt




Internal debt




External debt




Trend in Central Government Debt and Liabilities

With the process of fiscal consolidation resuming in 2010-11, wherein fiscal deficit was substantially reduced to 4.8 per cent of GDP from 7.8 per cent in 2008-09 and 6.6 per cent in 2009-10 (including the impact of bonds in lieu of subsidies), total debt and liabilities of the Central Government reduced significantly from 49 per cent of GDP in 2009-10 to 46 per cent of GDP in 2010-11.


Market Stabilization Scheme was started in 2004-05 to assist the Reserve Bank of India for sterilisation of its exchange market intervention by absorbing excess liquidity from the system arising on account of large inflow of foreign exchange11. This scheme provided for borrowings in addition to the normal borrowings of the Centre to finance its deficit. However, the proceeds so realized from these borrowings are sequestered in a separate cash account with RBI and are not used for purpose other than redemption of dated securities or treasury bills raised under this scheme.12


Interest payments on these borrowings are met by the Government and are duly factored in the fiscal deficit of the government. The outstanding liabilities under MSS (market stabilization scheme) went up to 3.4 per cent of GDP in 2007-08. This, in turn, has increased the reported debt of the Central Government to that extent and negated the impact of fiscal consolidation which actually aided in reducing the debt to GDP ratio for the period 2004-05 to 2007-08. Accumulation of debt under MSS is primarily a function of the extent of sterilization required by the monetary authority in meeting its monetary policy objectives.13


There is only limited correlation in the fiscal side in the form of interest obligation on the above mentioned debt. While evolving a path of fiscal consolidation for the future years, this component of debt is difficult to predict in medium term. At the same time, cash raised under this scheme is not used for financing14 the deficit of the Central Government. In view of the above, while reporting the general government debt and liabilities, this component has to be dealt with separately. After adjusting for the debt under MSS, the correction in debt to GDP ratio for the period ending 2007-08 truly reflects the impact of fiscal consolidation. Also, the deterioration in debt to GDP ratio during 2008-09 and 2009-10 is much more pronounced and truly reflects the impact of increase in fiscal deficit.15


The debt as percentage of GDP (after adjusting for MSS and NSSF liabilities) has improved from 52.5 per cent in 2005-06 to 46.2 per cent in 2007-08. This shows improvement of 6.3 percent of GDP during the above mentioned period of fiscal consolidation. Without netting of the impact of MSS, the reduction in debt over GDP during this period is 3.6 per cent only. Similarly, the increase in debt to GDP ratio which was 2.7 per cent of GDP (48.9 minus 46.2) is understated without netting of the impact of MSS during 2008-09 and shown as increase of 0.7 per cent of GDP (50.4 minus 49.7). During the period 2004-05 to 2007-08, the accretions under MSS liabilities were quite significant. This led to over projection of existing debt for the Central Government during the above mentioned period. This component partially negated the improvement in the level of debt achieved due to fiscal consolidation. During 2008-09 and 2009-10 the liabilities under MSS got liquidated and accretion under NSSF also slowed down. This resulted in lower contribution of these two components in the overall debt as reported in the budget document. Therefore it may be seen that the debt net of NSSF and MSS liabilities not used for financing Central Government deficit and with external debt at current exchange rate, gives the real depiction of movement in debt level along with the variation in fiscal policy of the Government. Debt as percentage of GDP has started going up after 2007-08 due to the larger fiscal deficit. With the reduction in fiscal deficit in 2010-11, it is once again showing a reducing trend.16


The 13th Finance Commission has recommended the reduction of the Consolidated debt of Central and State Governments to 68 percent of GDP by the end of 2014-15.


Redemption of debt

The various methods of public debt redemption are as follows:

1. Sinking fund method:

The Government creates a fund called sinking fund by accumulating a part of the public revenue every year for the repayment of debt. This is the most systematic and best method of debt redemption. The burden of debt is spread evenly over the period of accumulation of the fund. Sinking fund creates confidence among the lenders and increases the credit worthiness of the government.


2. Capital levy:

A direct tax upon the capital of the tax payers is called capital levy. It will be generally imposed in times of emergencies. It was advocated as a method of liquidating the unproductive war debts. Debt redemption by imposing a very heavy taxation on property has been advocated. However, this method has raised objections as heavy taxes might lead to undesirable effects on the economy.


3. Integrating the accounts of the RBI with those of the Government of India:

Many economists consider the liability of the Government of India to the RBI as fictitious. They are of the view that the accounts of the RBI should be integrated with those of the Government of India. If this is done, the debt to the RBI would get cancelled and the interest burden thereon will automatically be removed. In case, the accounts of the RBI are not integrated with those of the Government of India, the former should be asked to return a substantial portion of the interest which it receives from the government as the dividend. This dividend should be unused by the government to retire the market debt.17


4. Conversion:

Conversion is not repayment, it is only exchange of new debts for old. It is the process of converting or altering a loan with a given rate of interest into a loan at a lower rate of interest. This may take place at the time of maturity or before the time of maturity by the voluntary acceptance. The main advantage of conversion is that it reduces the interest burden of the state and relieves tax payers. For this purpose, the government had to maintain an adequate stock of securities for a smooth functioning of this method.


5. Selling contraband gold to retire debt:

The government has confiscated large quantities of contraband gold that come in through smuggling. Now India’s foreign exchange reserves have reached a satisfactory level. Thus, a substantial part of the gold reserves created by confiscating contraband gold should be sold in auction and the proceeds may be utilized to retire public debt.18


6. Terminable annuities:

The fiscal authority clears off a part of the public debt every year by issuing terminable annuities to the bond holders which mature annually. It is a method of redeeming debts by installments. The burden of debt goes on diminishing annually and by time of maturity it is fully paid off.


7. Additional Taxation:

The government imposes new taxes to get revenue to repay the principal and interest of the loan. This is the simplest method of debt redemption. If new taxes are levied to repay long term debts, the burden is imposed on future generation. This method causes a redistribution of income from the tax payers to the bond holders.


8. Surplus balance of payments -External debt redemption is possible only by accumulating foreign exchange reserves. Hence it is necessary to create a trade surplus by increasing exports and reducing imports. External debt can also be reduced by changing the terms of repayment. The loans raised must be used productively so that they are self liquidating posing no real burden on the economy.19


RBI measures to manage India’s debt

The Internal Debt Management Department was originally created as a cell within the Secretary's Department in April, 1992 comprising the Public Borrowing, Open Market Operations and Ways and Means sections. The Cell was fully constituted as an independent unit called Internal Debt Management Cell (IDMC) on October 1, 1992 and later renamed as the Internal Debt Management Department (IDMD) in May 2003. Consequent upon the formation of the Financial Markets Department (FMD) in October 2005, some of the market related activities were carved out from IDMD to form part of FMD. 20


Functions of IDMD

The main activity of the Department is to manage the public debt of Government of India/  State Governments.  The Department also regulates and supervises the Primary Dealers System and has the responsibility for development of Government Securities Market. These activities involve:

(i)      Floatation of Central/State Government Loans – preparation of calendar for  issuances of Government of India dated securities and Treasury Bills, introduction of new instruments for Government’s market borrowings;

(ii) Fixing of limits on Ways and Means advances (WMA) for both Central and State Governments and monitoring the use of these limits on a daily basis;

(iii) Authorisation, regulation and supervision of the Primary Dealer system;

(iv) Market development activities like the introduction of new instruments, development of trading platform, clearing and settlement systems and widening of investor base; 

(v) Facilitating State Governments' investment of their surplus cash balances in Treasury Bills and dated securities under various funds.


In thinking about the operational framework, it is useful to use the vocabulary of the ‘Front Office’, ‘Middle Office’ and ‘Back Office’. The Front Office negotiates all new loans. The Middle Office measures and monitors all loans and conducts policy formulation. The Back Office looks after auditing, accounting and data consolidation (EDMU, 2006).


·        Domestic Debt

Within the RBI, the Internal Debt Management Department formulates, in consultation with the Ministry of Finance, a core calendar for primary issuance of dated securities and treasury bills, and suggests the size and timing of issuance and conducts auctions, keeping in account the government’s needs, market conditions, and preferences of various segments. The RBI charges the Central and State Governments fees for issuing and managing securities.


Any person including firms, companies, corporate bodies, institutions, State Governments, provident funds and Trusts, can invest in government securities. NRIs, Overseas Corporate Bodies predominantly owned by NRIs and Foreign Institutional Investors registered with SEBI and approved by the RBI are also eligible to invest in government securities, subject to the Foreign Exchange Management Act, 1999.


·        External Debt

As regards external debt, the Fund-Bank Division, the External Commercial Borrowing (ECB) Division, ADB Division, EEC Division, Japan Division in the Ministry of Finance and RBI (IMF Loans) perform front office functions. The External Debt Management Unit performs the role of the Middle Office, and the Office of the Controller of Aid Accounts and Audit acts as the Back Office.


·        Cash Management

Cash management in India is a collaborative effort of the Reserve Bank of India (RBI) and the Budget Division, Ministry of Finance. The RBI acts as the banker to the Government and in this process maintains the Consolidated Fund of India. It also participates actively in the cash forecasting process, which is carried out via negotiations between the Budget Division and the RBI. The Monitoring Group on Cash and Debt Management coordinates this process in its meetings. The RBI uses the Ways and Means Advances, which are short-term (three month) loans to States to smooth temporary mis-matches in revenues and expenditures.


·        Contingent Liabilities

Government guarantees are approved by the Ministry of Finance, Department of Economic Affairs (Budget Division). Once a guarantee is approved by Ministry of Finance, it is executed and monitored by the Administrative Ministry concerned. The concerned Ministry is also required to annually report the status of the guarantee in this regard, until the guarantee falls due or expires.21



Debt management poses risks for both the public and private sectors – Risks include fiscal crisis; change in creditworthiness and insolvency (‘debt distress’); economic crisis and instability. The main reason for increase in internal public debt in India during 1961-2004 was the requirement of funds for financing various developmental programmes as both tax and non-tax revenues were totally inadequate to finance the government expenditure.


The external public debt in India Increased significantly during 1961-2004 as it was utilized to make import payments and solve balance of payment problems. The tremendous rise in total public debt in India during 1991-2004 provides an alarming signal to Indian economy. There is an urgent need to manage public debt in India. A government should manage its debt in order to raise the required amount of resources subject to the lowest possible medium/long term cost and consistent with a prudent degree of risk


Even though RBI has taken numerous steps a unified database about all onshore and offshore liabilities of the government (including contingent liabilities) is absent in the present system. Further, no single arm of government is charged with the function of analyzing such an integrated database and working towards identifying mechanisms through which the long-term cost of borrowing of the government is minimized.




·        Indian economy , Ruddar Dutt and K.P.M.Sundaram,61st ed., S. Chand Ltd,2009

·        Indian economy, Misra Puri, 28th ed, Himalaya Publishing house, 2010









1.       Akrani Gaurav. Public Debt In India - Debt Obligation of the Government. Available from: URL :http://kalyan-city.

2.       R.K. Misra and V.K. Puri. Public Debt in India. Indian Economy. Himalaya Publishing House, Mumbai . 2010; 28th ed: pp. 666

3.       Supra note 1

4.       Id

5.       Supra note 2 at 667

6.       FAQs, Available from : URL: /FAQDisplay.aspx

7.       Debt Trap. Available from: URL: definition/Debt-Trap.html

8.       Supra note 2 at 515

9.       Government Debt, Status Paper March 2012. Available from: URL:

10.     Debt-External, India. Available from: URL: www.indexmundi. com/g/g.aspx?c=inandv=94

11.     Supra note 9

12.     Government Status and Road Ahead. Available from: URL:

13.     Supra note 9

14.     Id

15.     Id

16.     Supra note12

17.     Supra note 2 at 673

18.     Id

19.     Supra note 1

20.     The Internal Debt Management Department. Available from : URL: 160609.pdf

21.     Report of the Internal Working Group on Debt Management. Available from: URL: Internal_Working_Group_on_Debt_Management.pdf


Received on 24.06.2013

Modified on 25.07.2013

Accepted on 04.08.2013

© A&V Publication all right reserved

Research J. Humanities and Social Sciences. 4(4): October-December,  2013, 543-549