VISHNU

MENON

 Public debt management is concerned with the decisions of forms of public debt, in terms of which new bonds are sold, maturing debts are redeemed or refunded, the proportion in which different forms of public debt should be issued, the pattern of maturities of debt and its ownership etc - Prof. Abbos

 Public

Debt is the debt borrowed by government through various methods from the public R.B.I. Formed Internal Debt Management Cell in October 01, 1992 Formation of debt policy that seeks to achieve certain objectives & the implementation of such a policy Methods adopted by the government through the processing of FLOATING, REFUNDING & REPAYMENT of public debt Management of public debt by Govt to avoid inflationary or deflationary effect on the

Manages: The form of issue of public securities The form of refund of public debt The proportion of different types of debt to be issued The pattern & structure of interest rate on securities Authoritative decision making in public debt

 Increase

or decrease of public debt has effect on the working of any economy Public debt influences the formation of the economic policy of the country Utilization of public debt will foster or hamper the changes in economic development Necessary to know the conditions which are essential for the implementation of planning policies Gives knowledge about the actual amount required for a certain policy

 To

maintain governments economic policy:Helps to raise the purchasing power and effective demand in depression period & viceversa during inflation Providing sufficient funds to economy during war period. To strengthen the money market of the country Beneficial for the activities of government Should not have any adverse effect on the economic condition of the country.

According to Philip E Taylor, three general principles of debt management can be identified as: a. The policies pursued must be able to extract from the public without undue coercion. b. The extraction of loanable funds from the market and its repayment when it is inconvenient to do so. c. It should be so placed as to minimize the need to enter the market when it is inconvenient to do so.

 Minimum

interest cost of servicing public debt. Satisfaction of the investors. Funding the short term debt into long term debt. Public debt must be in co-ordination with fiscal and monetary policies. Proper adjustment of maturity

 Low

interest obligation. Preference pattern of investors. Optimal maturity structure. Monetization of debt. Maintenance of interest rate Anti- cyclical use of debt

 Productive

debt & Unproductive debt Voluntary debt & Compulsory debt Internal debt & External debt Short term debt, Medium term debt & Long term debt Redeemable debt & Irredeemable debt Funded debts and Unfunded debts

 Public

debt when raised productive purposes and used to add the productive capacity of the economy Public debts which are fully covered by assets of equal or greater value. Self liquidating in nature Provides a continuous flow of income to Govt. The interest and principal amount is generally paid out of income earned by the government from the production projects E.g. Railway projects, Irrigation projects, Power generation Projects etc

Public debt which do not add to the productive capacity of the economy Public debt used for war, famine relief, social services, etc. is considered as unproductive debt Not necessarily self liquidating Burden to the government Repaid generally through additional taxes.

 Loans

are provided by the members of the public on voluntary basis Voluntary in nature Obtained in the form of market loans, bonds, etc. 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.

 Rare

phenomenon in modern public finance Raised in special situations like war or crisis Public are compelled to give debt The rate of interest on such loans may be low These loans are similar to tax, the only difference is that loans are rapid but tax is not. E.g. Compulsory deposit scheme In India

 Funds

borrowed by the government from various sources within the country. Include individuals, banks, business firms, and others. Instrument include market loans, bonds, treasury bills, ways and means advances, etc. Repayable only in domestic currency It imply a redistribution of income and wealth within the country & therefore it has no direct money burden. The internal debt of the Central Government of India has increased from Rs.1.54 lakh crore in

 Debts

raised from foreign countries or international institutions Debts repayable in foreign currencies Voluntary in nature It involves transfer of resources from foreign countries to the domestic country Repayment of interest and principal amount through transfer of resources takes place in the reverse direction. Help to take up various developmental programmes in developing and underdeveloped countries

 Short

term debt matures within a duration of 3 to 9 months Low rate of interest E.g. Treasury bills with maturity period of 91 days and 181 days

 Maturity

period of above one year and up to 5

years Borrow for medium term needs, development & non development activities E.g. Different types of market loans

 Maturity

period of 10 years and above High rate of interest Raised for developmental programmes and to meet other long term needs of public authorities.

 Repayable

only after a long period of time of 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 favorable. Undertaken for meeting more permanent needs, like building up economic & industrial infrastructure Establishes a separate fund for repaying

 Debts

which are incurred to meet temporary needs of the government Maturity period less than one year Unfunded debt has an obligation to pay at due date with interest. Generally low rate of interest

 Government

promises to pay off these debt at some future date It can be redeemed and have a maturity period The government has to make arrangement to repay the principal & the interest on the due date.

 Debts

with no maturity period Govt. may pay interest regularly, but no repayment date of the principle amount is fixed It is also a perpetual debt Usually government does not resort to such borrowings

TWO CONCEPTS: PAY AS YOU USE FINANCE PAY AS YOU GO FINANCE

SATISFACTION OF SOCIAL WANTS AND FUTURE BENEFITS

COST PAYMENTS ARE MADE OVER THE YEARS CAPITAL OUTLAYS FOR CONTINUOUS AND DISCONTINUOUS PROJECTS

RELEASE OF RESOURCES MAY BE EITHER FROM PRESENT CONSUMPTION OR FROM CAPITAL FORMATION LOAN FINANCE

 CURRENT BUDGET AND CAPITAL BUDGET

ACCOUNTS
CURRENT BUDGET TAX FINANCED CAPITAL BUDGET LOAN FINANCED

CURRENT BUDGET RECEIPTS a) TAXES

CAPITAL BUDGET EXPENDITURES RECEIPTS a)Expenditure for current benefits a)Sale of asset EXPENDITURE a)Expenditure for future benefits b)Net increase in provision for future benefits

b) OTHERS

b)Interest amount b)Net borrowings

c)Other current expenditures

c)Net increase in provisions for future benefits

 CONTRIBUTORY
PROHIBITS FOCUSSES

AND QUID PRO BASIS

BORROWING

ON LIMITING CURRENT EXPENDITURES TO CURRENT RECEIPTS AS AN IDEAL FISCAL POLICY BY LOCAL GOVERNMENTS

OBSERVED

 SECURING A SATISFACTION

COORDINATION BETWEEN TREASURYS DEBT MANAGEMENT AND CENTRAL BANKS MONETARY POLICY

THREE APPROACHES:

*POSITIVE MANAGEMENT *NEUTRAL MANAGEMENT *NEGATIVE MANAGEMENT

 ACCORDING

*DEBT MANAGEMENT POLICY CREATES STABILISING OR DESTABILISING EFFECT *PUTS RESTRAINT ON ADDITIONAL CREDIT * LONG TERM OBLIGATIONS ARE CHANGED INTO SHORT TERM BILLS * DURING BOOM PERIODS, INTEREST RATES RISE AND GOVT. IS REQUIRED TO ENTER THE LONG TERM MARKET.

TO THIS CONCEPT:

 DOESNT

PROMOTE STABILISATION THROUGH DEBT MANAGEMENT STABILISATION IS LEFT TO CENTRAL BANK AND DEBT MANAGEMENT BY TREASURY REMAINS NEUTRAL DIFFICULT FOR THE GOVT. TO FOLLOW NEUTRALITY DEBT TO BE MAINTAINED IN THE FORM THAT EXISTS CURRENTLY

 MINIMISING

INTEREST COST ON NATIONAL DEBT TAKES ADVANTAGE OF MARKET CONDITIONS ENTERS LONG TERM MARKET DURING THE TIME OF RECESSION UNDESIRABLE FROM ALL POINTS OF VIEW

INTEREST COST PRINCIPLE Not adequate GOVERNMENT CONTROL OVER MONEY SUPPLY DEBT MONETISATION Lengthening the debt
MINIMUM

 Debt

managers understand a clear understanding of macro-economic developments Frames fiscal and monetary policy Imf- 1/5th of the developing countries were explicitly managing their debt systematically

 Extent

of govt. regulation of foreign debt Appropriate composition of debt

 In

most countries, public sector itself is the largest borrower Prices of goods produced by private companies may be destroyed by Govt. policies
Amount of public debt depends on the growth rate of the economy and its export performance of the country