Monday, 10 November 2014


                                          BURDEN OF PUBLIC DEBT
There are two types of sources of public debt, so that sources are burden i.e burden of internal debt and burden of external debt..

Introduction To The Burden of Public Debt :

Over the years, the public debt of the India's Central and that of State government has increased considerably during the planning period. The Government borrows funds by way of public debt to meet the various development and non-development expenses.
Apart from internal debt, there are also internal liabilities of the central government in the form of small savings of the public, provident funds, reserve funds & deposits of Government department.
Both internal and external debt carry a burden on the economy of nation.

The Burden of Internal Public Debt :

1. Internal debt trap:

One of the bad effects of internal debt is the interest paid by the government. Such interest payments increase public expenditure and may become a cause for fiscal deficit. If internal public debt is not checked and kept within limits, it may take the country to the worst position called 'Internal Debt Trap'.

2. More burden on poor and weaker sections:

Internal debt provides opportunities for the rich and higher middle class to earn a higher rate of interest from the state on their lending. At the same time the pobr suffer a lot due to the tax burden. The government levies taxes to repay interest on public debt. But the tax burden does not necessarily fall on the rich unless it is progressive in nature. In the case of indirect taxes, the burden is felt more by the poor than the rich.

3. Increasing interest burden:

Public borrowing may become costlier for the government especially when it resorts to public borrowing by issuing bonds and debentures. Such bonds and debentures carry a high rate of interest to the extent of 15 percent. The impact of such interest payments may develop manifold and still worsen in the future if the government stick to the same policy of borrowing in the years to come.

4. Unjustified transfer:

The servicing of internal debt involves transfers of income from the younger to the older generations and from the active to the inactive enterprises.
The government imposes taxes on enterprises and earnings from productive efforts for the benefit of the idle, inactive, old and leisurely class of bond holders. Hence work and productive risk taking efforts are penalised for the benefit of accumulated wealth. This adds to the net real burden of debts.

5. Indirect real burden:

Internal debt involves an additional indirect real burden on the community. This is because the taxation required for servicing the debts reduces the tax payer's ability to work and save and affects production adversely. The government may also economise social expenditure thereby, reducing the economic welfare of the people.
Taxation will reduce the personal efficiency and desire to work. Thus there would be a net loss in the ability and desire to work. The creditor class will also not have any incentive to work hard due to the prospect of receiving interest on bonds. This would further cause a loss to production and increase the indirect burden of debt.

The Burden of External Public Debt:-

External debt is beneficial in the initial stages as it increases the resources available to the country. But its repayment & servicing creates a burden on the debtor country.

1. External debt trap:

The external debt creates direct money burden. This is because; it involves transfer of funds from the debtor country to foreign citizens. The degree of burden depends upon the interest rate, and the loan amount. The loans are normally to be paid in foreign currency. Therefore, the funds are mostly transferred from export earnings or by raising more funds from foreign markets. Borrowing by way of additional loans would put extra burden on the country. The situation may become so worse, that the country may be caught in the external debt trap. It may have to borrow from foreign markets to repay the interest amount and it would be very difficult to repay the principal amount.

2. Direct real burden:

The external debt may also result in direct real, burden. The citizens of the debtor will have to suffer loss of economic welfare to the extent of repayment of principle amount and interest burden. The foreign currency earned through exports would have been utilized to import better goods and technology. Which would have increased the economic welfare of the citizens of the debtor country. But because of external debt repayment, they have to restrict their welfare which the imported goods would have provided. In other words, the citizens of debtor country are deprived of imported goods and service to the extent till the loans and interest amount is repaid.

3. Decline in expenditure to public welfare programmes:

When the government spends a significant portion of its resources towards the payment of foreign debt it reduces the government expenditure to that extent which otherwise would have been spent for public welfare programmes.

4. Decline in the value of nation's currency:

The repayment of external debt involves an increase in the demand for the currency of the creditor country. This will raise the exchange rate of the creditor country's currency, and aggravate the problem of foreign exchange crisis.
The creditor country may also be adversely affected if it is induced to import more from the debtor country. This may hinder the growth of their domestic industries and cause unemployment.

5. Burden of unproductive foreign debt:

The magnitude of external debt burden depends upon whether the debt is incurred for productive purposes or for unproductive purposes. If it is incurred for unproductive purposes, it will create a greater burden and sacrifice on the citizens of the debtor country.

6. Political exploitation:

In recent years, it was found that the lending countries who dominate international organisations like World Bank & international monetary fund use the lending opportunity as an instrument to exploit the borrowing countries economically & politically.

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