The government spends more than it earns. The gap is filled by borrowing. All this borrowing, added up, is the public debt. Too much debt is a problem. Interest eats up the budget. So India passed a law in 2003 to keep debt and deficits in check. It is the FRBM Act. Exams ask about the types of debt, the FRBM targets and the committees. This post explains them in simple words. It ends with 15 previous year questions.
Key Points (Quick Revision)
- Public debt is the total borrowing of the government that is still to be repaid.
- It has two parts: internal debt (borrowed inside India) and external debt (borrowed from abroad).
- The FRBM Act was passed in 2003 and came into force in 2004.
- The N. K. Singh Committee (2017) suggested a debt target of 60% of GDP for the Centre and States together.
- Public debt of the Centre is managed by the RBI, which is the government's debt manager.
1. What is public debt?
Public debt is the money the government owes. It is the sum of all past borrowings that have not yet been repaid.
The government borrows for a simple reason. Its spending is more than its revenue. The gap is the fiscal deficit. Every year's fiscal deficit adds to the stock of public debt.
Public debt is a stock. It is measured on a date. The fiscal deficit is a flow. It is measured over a year. The two are linked, like a tank and a tap.
In India, the term "public debt" in the Budget means the debt of the Central Government. The debt of the States is counted separately. Together they make up the general government debt.
2. Internal debt and external debt
Public debt is divided by where the money comes from.
| Type | Borrowed from | Main instruments |
|---|---|---|
| Internal debt | Lenders inside India - banks, insurance companies, provident funds, the RBI, the public | Dated government securities (G-Secs), Treasury Bills, small savings, cash management bills |
| External debt | Lenders outside India - foreign governments, the World Bank, the ADB, the IMF | Multilateral loans, bilateral loans |
In India, internal debt is the bigger part. External debt of the Central Government is a small share, and most of it is from multilateral bodies and foreign governments on soft terms.
Internal debt has two parts. Market loans are raised by selling government securities. Other liabilities include small savings, provident funds and reserve funds, which the government holds and must repay.
3. Who manages the debt?
The Reserve Bank of India manages the public debt of the Central Government. It sells government securities through auctions. It also manages the debt of States under agreements with them.
The government borrows mainly through:
- Dated securities or G-Secs, with a maturity of more than one year.
- Treasury Bills, which mature in 91, 182 or 364 days.
- Cash Management Bills, which mature in less than 91 days.
- Small savings schemes, such as the PPF and the National Savings Certificates, through the National Small Savings Fund.
Government securities are held mainly by commercial banks, insurance companies, provident funds and the RBI. Banks hold them to meet the SLR.
4. Why too much debt is a problem
Debt is not bad in itself. Borrowing to build roads, ports and schools can pay for itself. The problem is debt that grows faster than the economy.
- Interest burden. Interest payments are the single largest item of Central Government expenditure. Money spent on interest cannot be spent on health or education.
- Crowding out. When the government borrows a lot, less money is left for private firms, and interest rates rise.
- Inflation. Borrowing from the RBI, called monetisation of the deficit, adds to money supply and prices.
- Burden on the future. Today's debt is repaid from tomorrow's taxes.
The common measure is the debt-to-GDP ratio. It compares the stock of debt to the size of the economy. A rising ratio is a warning sign.
5. The FRBM Act, 2003
The Fiscal Responsibility and Budget Management Act was passed by Parliament in 2003. It came into force on 5 July 2004. Its aim is to make the government responsible about deficits and debt.
The original Act set two main targets:
- Bring the fiscal deficit down to 3% of GDP.
- Bring the revenue deficit down to zero.
These were to be met by 2008-09. The global financial crisis of 2008 pushed the targets back, and they were changed many times after that.
The Act also asks the government to place three statements before Parliament with the Budget:
- The Medium-term Fiscal Policy Statement, with three-year targets.
- The Fiscal Policy Strategy Statement.
- The Macroeconomic Framework Statement.
The Act bars the government from borrowing directly from the RBI, except in special cases. This stops routine monetisation of the deficit.
Most States have passed their own FRBM Acts, with a fiscal deficit limit of 3% of the state's GSDP.
6. The N. K. Singh Committee and the 2018 amendment
In 2016, the government set up a committee under N. K. Singh to review the FRBM Act. It reported in 2017. Its main ideas were:
- Make debt the main target, not the deficit. It suggested a debt-to-GDP ratio of 60% for the general government by 2023 - 40% for the Centre and 20% for the States.
- Keep the fiscal deficit at 3% of GDP as the operating target, to reach the debt goal.
- Allow an escape clause. The target can be relaxed by up to 0.5% of GDP in a war, a national calamity, a collapse of agriculture or a sharp fall in growth.
- Set up a Fiscal Council, an independent body to check the government's fiscal numbers.
In 2018, the FRBM Act was amended through the Finance Act. The amendment adopted the debt target of 60% of GDP and the escape clause. It dropped the revenue deficit target. The Fiscal Council was not created.
The escape clause was used in 2020 during the Covid-19 pandemic, when the fiscal deficit rose sharply.
7. Related terms you must know
- Debt sustainability - the ability to carry debt without a crisis. It depends on growth being higher than the interest rate.
- Debt trap - a situation where new loans are taken only to pay interest on old loans.
- Sovereign debt - the debt of a national government, often used for external borrowing.
- Contingent liability - a guarantee given by the government that may become a debt, such as a loan guarantee to a public enterprise.
- Off-budget borrowing - borrowing by government bodies that does not appear in the Budget but is paid by the government.
- Primary deficit - fiscal deficit minus interest payments. It shows the borrowing needed for current spending alone.
8. Previous year questions
- What is public debt? – The total borrowing of the government that is yet to be repaid
- Public debt borrowed from lenders within the country is called what? – Internal debt
- Public debt borrowed from foreign governments and institutions is called what? – External debt
- In which year was the FRBM Act passed? – 2003
- What does FRBM stand for? – Fiscal Responsibility and Budget Management
- What fiscal deficit target did the FRBM Act set? – 3% of GDP
- Which committee reviewed the FRBM Act in 2016-17? – N. K. Singh Committee
- What debt-to-GDP target did the N. K. Singh Committee suggest for the general government? – 60% of GDP (40% Centre, 20% States)
- By how much can the fiscal deficit target be relaxed under the FRBM escape clause? – 0.5% of GDP
- Which institution manages the public debt of the Central Government? – The Reserve Bank of India
- What are the maturities of Treasury Bills in India? – 91, 182 and 364 days
- What is the largest item of expenditure of the Central Government? – Interest payments
- Which deficit is equal to fiscal deficit minus interest payments? – Primary deficit
- Borrowing by the government from the RBI by printing money is called what? – Monetisation of the deficit
- Which body did the N. K. Singh Committee suggest to monitor fiscal rules? – Fiscal Council
9. How to revise this topic
Start with the two parts: internal debt and external debt, and who lends in each.
Next, fix the FRBM numbers: 2003 Act, 2004 in force, 3% fiscal deficit, zero revenue deficit.
Then learn the N. K. Singh numbers: 2017 report, 60% debt (40 + 20), 0.5% escape clause, Fiscal Council.
Finally, memorise the instruments: G-Secs, T-Bills (91, 182, 364 days), Cash Management Bills, small savings.
10. Frequently Asked Questions
What is the difference between internal and external debt?
Internal debt is borrowed from lenders inside India, such as banks, insurance companies and the public, through government securities and small savings. External debt is borrowed from foreign governments and bodies such as the World Bank and the ADB.
What is the FRBM Act?
The Fiscal Responsibility and Budget Management Act, 2003 is a law that sets targets for the fiscal deficit and government debt. It came into force in 2004 and was amended in 2018 to adopt a debt target of 60% of GDP.
What did the N. K. Singh Committee recommend?
A debt-to-GDP target of 60% for the Centre and States together (40% and 20%), a fiscal deficit of 3% of GDP, an escape clause of 0.5% of GDP and an independent Fiscal Council.
Who manages India's public debt?
The Reserve Bank of India manages the public debt of the Central Government and, under agreements, of the States. It sells government securities through auctions.
What is the escape clause in the FRBM Act?
It allows the government to exceed the fiscal deficit target by up to 0.5% of GDP in special situations such as war, a national calamity or a sharp fall in growth. It was used during the Covid-19 pandemic in 2020.
For more Economy topics in simple language, see our Fiscal Policy and Fiscal Deficit, Union Budget Explained and RBI and its Functions posts, or browse the Economy section. Preparing for a banking exam? Start with the SBI PO guide or join the 100 Hour GS Course.