Debt can be simply understood as the amount owed by the borrower to the lender. The total financial obligations of the public sector make up a nation’s gross government debt, also known as public debt or sovereign debt.

The financial market where investors may purchase and sell debt instruments of different forms and attributes is generally referred to as the “debt market.”

Government borrowing over time is mostly due to prior shortfalls in the budget. When a government’s expenses exceed its receipts, a deficit results. Both domestic and foreign people may be subject to government debt.

The sum is counted against the nation’s external debt if it is owed to citizens of another country.

Debt instruments

A debt instrument is an asset that provides the lender (investor), a fixed income on the asset from the borrower. The lender receives the principal back in due course along with interest payments.

The Reserve Bank of India has allowed the following bodies to issue debt instruments in India:

• Central and State Governments
• Municipal Corporations
• Government agencies
• Banks
• NBFCs
• Public Sector Units
• Corporates

Types of Debt Instruments in India

The debt market in India is one of the largest in Asia and broadly consists of government securities (G-Secs), including central and state government securities and bonds issued by corporations.

Debt products available include bonds, Certificates of Deposit, Commercial Papers, Debentures, National Savings Certificates, Government Securities, Fixed Deposits, and more.

Government bonds:

• These are issues by central or state governments.
• These bonds act as a loan wherein the government borrows money from investors at a predetermined interest rate for a specific period.
• Government bonds fall under the broad category of government securities (G-secs) and are issued under the supervision of the Reserve Bank of India.
• The interest rate offered on the government bond, also known as the coupon rate, can be either fixed or floating.

Debentures:

• Companies issue debentures to raise funds by borrowing money from the public.
• The company thus promises to pay fixed interest to the investors.
• These debt instruments may or may not be backed by any specific security or collateral. Hence, the investors have to rely on the credit ratings of the issuing company as security.

Fixed deposits:

• Fixed deposits (FDs) are one of the most popular investment products as they are versatile and flexible.
• Banks, certain Non-Banking Finance Companies (NBFCs), and even post offices issue fixed deposits.
• They are popular due to their ease of investment, liquidity (except in tax-saving FDs), and uncomplicated nature.

Debt mutual funds:

• Debt Mutual funds invest the pooled money in fixed-income products like government securities, corporate bonds, and some part in money market instruments.
• Debt funds, also known as fixed-income funds, are considered less volatile than equity funds as they invest in fixed-income products. They also have a low-cost structure.

Certificates of deposit

• Certificates of Deposit (CDs), introduced in India in 1989, are short-term debt instruments.
• Banks and Financial Institutions issue CDs in dematerialized form against the funds that an investor deposits for a specific term.
• The Reserve Bank of India lays down guidelines from time to time for their issue and operation.
• Banks must maintain the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) on the price of CDs.
• All individual residents in India are eligible to buy certificates of deposit. The minimum duration of a CD issued by a bank is seven days and goes up to one year

Public provident fund:

• The Public Provident Fund (PPF) scheme is a popular long-term investment product. PPFs have been around since 1968.
• In this investment option, you put aside a small sum of money regularly to create wealth in the long term.
• Interest rates are fixed by the government quarterly. And the Investment and returns are tax-exempt.

Public debt

Public debt is the total amount borrowed by the government of a country when the government’s revenue from taxes and other sources falls short of its spending requirements.

In India, public debt includes the total liabilities of the Union government that have to be paid from the Consolidated Fund of India (Article 292).

It is further classified into internal & external debt. Internal debt is categorized into marketable and non-marketable securities.

• Marketable government securities include G-secs and T-Bills issued through auction.
• Non-marketable securities include intermediate treasury bills issued to state governments and special securities issued to national Small Savings Fund among others.

Sometimes, the term is also used to refer to the overall liabilities of the central and state governments.

• However, the Union government clearly distinguishes its debt liabilities from those of the states.
• It calls the overall liabilities of both the Union government and state General Government Debt (GGD) or Consolidated General Government Debt.

The internal debt comprises loans raised in the open market.

• It also includes borrowings through treasury bills including treasury bills issued by state governments, commercial banks, and other investors.
• It also includes non-negotiable, non-interest-bearing rupee securities issues to international financial institutions.

The part of a nation’s debt that is borrowed from foreign lenders, such as commercial banks, governments, or international financial institutions, is referred to as its external debt.

• These loans must typically be repaid in the currency used to make the loan, plus any applicable interest.
• The borrowing nation may sell and export items to the lending nation to get the required cash.

The amount of the government’s debt is crucial since a sizable portion of annual payments (around 25%) are made merely to cover the interest on the previous debt. For the current fiscal year, the government’s debt is predicted to be about 62% of GDP.

The debt-to-GDP ratio shows how probable it is that the nation will be able to pay off its debt. Investors frequently use the debt-to-GDP ratio to determine the capacity of the government to finance its debt. Global economic crises have been fueled by higher debt-to-GDP ratios.

Public debt management

Sovereign or public debt management is the process of establishing and executing a strategy for managing the government’s debt to raise the required amount of funding.

It aims to achieve its risk and cost objectives and to meet any other sovereign debt management goals the government may have set, such as developing and maintaining an efficient market for government securities.

In 2015, the creation of a statutory body called Public Debt Management Agency (PDMA) was envisaged in India.

• As the RBI set interest rates and conducted the purchase and sale of government bonds, it raised issues of conflict of interest.
• Till the time a PDMA comes into place, the government created an interim arrangement that deals with the management of public debt called the Public Debt Management Cell.

Public Debt Management Cell

Public Debt Management Cell is an interim arrangement before setting up an independent and statutory debt management agency namely the Public Debt Management Agency (PDMA).

PDMC has the following advisory functions to the Government:

• Plan borrowings of the Government, including market borrowings, other domestic borrowings, SGBs
• Manage Central Government’s liabilities including NSSF, and contingent liabilities.
• Monitor cash balances of the Government, improve cash forecasting, and promote efficient cash management practices.
• Advise other Divisions in DEA on matters related to External Debt involving external borrowings through MI, Bilateral cooperation, and other possible sources, in terms of cost, tenure, currency, hedging requirements, etc., and monitor developments in foreign exchange markets.
• Foster a liquid and efficient market for Government securities
• Develop interfaces with various stakeholders/agencies in the regulatory/financial architecture etc. to carry out assigned functions efficiently.
• Advice on matters related to investment and capital market operations.
• Undertake research work related to new product development, market development, risk management, debt sustainability assessment, other debt management functions, etc.
• Develop a database system for collecting and maintaining a comprehensive database of Government of India liabilities on a near real-time basis and shall be responsible for the publication of relevant information.
• Carry out Preparatory work for independent PDMA.

An excessive level of public debt can result in higher interest rates, which has a crowding effect on the amount of private investment in the economy and the rate of economic expansion as a whole. Although it temporarily boosts overall demand, if left unchecked it can cause a country’s economy to experience spiraling losses.