There are four sources of Government revenue.

  • Taxes
  • Public loans
  • Surplus of Public enterprises
  • Deficit financing

Thus, one of the sources of Government revenue in the modern times is public debt which means borrowings of the Government from the domestic as well as foreign markets.

The domestic borrowings are known as internal debt or local debt and borrowings from the foreign markets are known as external debt or foreign debt.

Sources of Internal Debt:

In Internal debt there are Market loans, Government bonds, Bearer Bonds

Short term treasury bills issued to Reserve Bank of India and Commercial Banks against Government borrowings, Provident and Public Provident funds and Postal savings and money borrowed from Government Departments.

Sources of External Debt:

In external debt there are loans taken from the sources like the World Bank, International Monetary Fund, International Development Association and from Individual countries like USA, UK. Japan etc. non resident Indian deposits commercial borrowings by the public and private sector interest free rupee loans approved by certain countries.

In the modern world no country is self sufficient. It has to depend upon other countries and various external organisations to obtain financial resources for consumption as well as development purposes. India is no exception to this The internal debt is raised for the following purposes.

The mounting public expenditure of the government. For controlling money supply and rising prices. (inflation)

For raising financial resources for ambitious Indian five years plans For increasing effective demand during depression phase of a trade cycle (This is the object particularly in developed countries where there are perennial problems of over production and unemployment).

For reducing inequalities and as a substitute for taxes. For meeting some unexpected events.

The external debt is raised for financing imports both of consumer goods such as food, cooking oil as well as capital goods such as machines, spare parts, etc.

External debt of India:

External assistance to India has been in two forms such as grants and loans. While grants do not involve any repayment obligation, loans carry an obligation to pay interest and repay the principal. About 90 per cent of the external assistance received by India has been in the form of loans. These loans have been from different sources like World Bank, International Monetary Fund (IMF), International Development Association, USA, UK… Japan, etc.

A large part of the loans, especially from multilateral and bilateral agencies has high degree of concession ability Le, grant element of at least 25 per cent. The share of concessional debt in total debt was about 10.5 per cent at the end of December 2013. At one time (1980-81) it was as high as 75 per cent.

Amount of external debt India’s external debt amounted to 13,470 crore at the end of March 1981. As liberal use of borrowing has been made ever since then, the external debt stood at more than 4,80,00X) crore in March, 2001-02 and more than 5,65,000 crore in 2006-07. In March 2013 the external debt was more than 22,00,000 crore.

The external debt was 11.7% of GDP in March 1991, 21% of GDP in March 2002, and 23% in March 2013.

The debt service ratio to current receipts was 35.3% in 1990-91 and 13,7% in 2001-02 In 2011-12 it has come down to 6%. The debt service ratio means that portion of the current foreign exchange earnings from the exports of goods and services which is used for paying back the principal and the interest amount of foreign loans.

India is a country with very high foreign debt. As per the world Bank, among the top 15 debtor countries of the world, India improved its rank from third debtor after Brazil and Mexico in 1991 to ninth in 2001. Its rank however, increased to third after China and Brazil in 2012. It means that India was the third most indebted country in 2011. (the World Bank has classified India has a low indebted country).

India is in vulnerable position with regard to the foreign debt. This is because our exports are just 25% of our GDP. (2012-13) our debt servicing is very large every year the deficit in the balance of payment goes on widening. and therefore any external shock which could reduce India’s exports could create a big problem in debt servicing

Thus, there is a great need for increasing exports of goods and services to increase the potential capacity of the nation to service the external debt.


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Balance of payment

Law of Agency

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