Today in this article I will tell you what is public debt? Why is it important for a country? I will tell you in more detail too. If you want to know about debt management plan, you can visit what is debt management I have written a detailed article on it.
We have also written detailed articles on GST new update, GST rate cut list sector wise and why the government reduced the GST rate. Without wasting time let’s move ahead.
What is public debt?
In simple words, ‘public debt’ means debt on the government. When a country’s (government’s) expenditure is high and income is low, the government has to take loans from people, banks or other countries to meet the financial needs; this loan is called public debt.
It’s similar to how we take out loans when we need money. The only difference is that we borrow small amounts, while countries take out large loans.
Why does the government have to take loans?
Mainly the government takes such huge loans in only 3 situations
- When less money comes from taxes and more expenditure is incurred.
- When the government has to undertake many big projects simultaneously for development.
- When there is an emergency in the country (during Corona period)
Why debt management is important?
There is no harm in taking debt, but it is very important to repay it on time and manage the debt. If the government takes it, then the government has to keep many things in mind; I will tell you some of them….
- Debt has to be repaid on time, otherwise interest keeps accumulating.
- If the debt exceeds the limit then the economy becomes hollow from within.
- If the debt is not paid on time, the investor’s confidence may be broken.
- Debt also causes inflation because the government has to increase tax rates to pay off public debt.
Parts of public debt
There are following types of public debt
Internal debt
In simple words, ‘Internal Debt’ means when the government takes loan from the people, banks or companies of its country, it is called ‘Internal Debt’.
Example: The Indian government took loans from everyone; the people of India bought bonds
External debt
External debt is the debt that the government takes from people, banks or international organisations of other Countries. It is called external debt.
Example: India took loan from World Bank, IMF gave loan to India.
Short term debt
Short-term debt is a type of debt in which the government takes loans for 1 year. The government takes on short-term debt mainly for salary payments, subsidies, or emergency situations. Example: treasury bills, short-term bonds
Long term debt
Long-term debt is typically for a minimum of five years and can be taken for 10 years or more. The government uses this term to fund larger development projects, such as building highways, schools, colleges, or rail projects.
Example: government bonds, long-term loans
Secured debt
Secured debt means the government pledges something for the loan, such as property, gold, or an asset. If the government is unable to repay the debt, whoever the government has borrowed from can take those things.
Unsecured debt
The government does not pledge anything in this loan; the loan is granted solely on trust. If the government is unable to repay the loan, the lender could suffer losses.
Also learn about what is debt management plan?
Public debt management Vs private debt management
topic | Public debt management | Private debt management |
Planning | The government makes a rescue plan by looking at its expenditure, development plans, and fiscal deficit. | Individuals or companies create plans based on their income, expenses, and business goals. |
issuance | The government issues money through bonds, treasury bills and loans. | The company takes a loan, issues debentures, or borrows money from a bank |
Repayment | The government repays old loans from future tax collections or new borrowings. | The individual/company pays the money from their earnings in the form of installments. |
Interest burden | If the debt becomes too large, the government has to pay interest every year – the public is also affected | If the individual/company defaults on time, the interest increases and the credit score falls. |
management | The government has to manage the debt together with the Reserve Bank and the Finance Ministry. | The company has to keep track of the debt with its accountant or finance team. |
Now the difference between public debt management and private debt management must have become clear to you.
Objectives of Public Debt Management
Public debt management have mainly 4 objectives
Ensuring government financing needs are met
When the government has to complete many projects at the same time and is short of money, then in this situation the government takes loan and continues its work.
The objective of public debt management is to ensure that the government gets the money on time when it needs it.
Maintaining low borrowing costs
The government also has to pay interest on the loan, the government’s objective here was to minimize the expenditure on taking loans so that the government can invest more money in development.
Reducing financial risks
There are two types of risks in taking government debt.
Currency risk: When the government borrows from other countries, it receives the loan in dollars, not Indian rupees. If the rupee weakens, more money will have to be paid to repay the debt. This is a major risk.
Example: Let’s say India borrowed $1 billion from him, and $1 = 70 Indian rupees. The total loan would be 70 billion in Indian rupees.
If after 2 years the rupee weakens and 1 dollar = 85 Indian rupees, then the loan which was earlier worth 70 billion Indian rupees will now have to be repaid with 85 billion Indian rupees.
Due to the fall in the currency rate, India will have to pay 15 billion Indian rupees extra.
Interest rate risk:If the country suddenly increases its interest rate, then more money will have to be paid while repaying the debt.
Let’s explain this with an example: Suppose an Indian company took a loan of ₹100 crore from a bank, with an interest rate of 6% per annum. So, it would have to pay 6% interest every year.
But if RBI increases the interest and the bank increases the rate from 6% to 9%, then now the company will have to pay Rs 9 crore every year.
Due to increase in interest rate, the company will now have to pay Rs 3 crore extra, that too per year.
Public debt in India
Let us understand this in parts.
Current status
In 2025, the Indian government’s total debt was 196 lakh crore. Out of this, only 3.41% of the debt was taken from foreign countries; the remaining 96.59% of the debt was taken from within India itself.
The debt-to-GDP ratio is currently hovering above 80%, which is considered somewhat risky. GDP refers to a country’s total income; if debt exceeds it, the economy weakens and could crash at any time.
Who handles public debt in India?
In India, public is managed by 2 major institutions.
RBI (Reserve Bank of India)
The RBI issues bonds, issues treasury bills, and raises money from the market for the government; all under the RBI Act, 1934.
Ministry or finance
It manages the government’s treasury, plans loans, accounts for debt in the budget, and follows the rules of the FRBM Act.
Together, they manage India’s public debt so that loans are received and repaid on time.
How government takes debt?
The government takes debt in certain ways, which are called debt instruments.
Government securities
Long-term bond: 5 to 20 years.
Treasury bills
Short-term debt, such as 91, 182, and 364 days.
Bonds
Bonds with different names such as inflation-linked bonds, green bonds, etc.
Challenges in Public Debt Management
When the government takes on debt, managing it is not easy. This creates numerous problems, and if they are not resolved, the economy could crash. Let’s understand some of these problems.
Fiscal deficit
The government’s income (taxes, revenue) is low, and expenses are high. When expenses increase every year and income does not, the government has to take loans, and this cycle keeps repeating, and the debt on the government keeps increasing.
Interest pressure
The more the government borrows, the more interest it has to pay. A major portion of the government’s income goes solely to interest payments, leaving little money for development.
External debt dependency
If the government takes more debt from other countries, it becomes risky because if the value of the rupee decreases or the global market crashes, then there is a big problem in repaying the debt.
Inflation
Sometimes, if the government injects too much money into the market after taking out a loan, it causes commodity prices to rise sharply. This leads to inflation in the country.
Currency fluctuation
If the government borrows more than the dollar limit, then after taking the loan, if the value of the rupee decreases, then more money will have to be paid to repay that loan.
Importance of debt management
I have explained this in 4 parts.
To stable economy
When the government takes out a loan, it must be managed properly and repaid on time, which makes the country’s economy stable and powerful. If the government fails to manage its debt properly, the country’s economy can crash.
Builds investor confidence and trust
If the government manages its debt properly, those who lend to it trust that the government will repay their debt on time. Therefore, those who lend money buy government bonds, which keeps money flowing through the country.
Prevents debt trap
When the government continues to borrow without proper research and the debt grows so large that new debt is needed to pay off old debt, this situation is called a debt trap. Debt management can help the government avoid this situation.
Encourages sustainable growth
When government debt management is effective, the government is able to invest more in development. This development is not for today, but for tomorrow.
Conclusion
Public debt isn’t just a matter of accounting—it’s the foundation of a country’s economy. When the government borrows, it raises not just money, but also people’s trust, dreams of development, and preparations for tomorrow.
If the debt is repaid on time, managed correctly, and planned without panic—it moves the country forward. But if the debt balance is distorted, it leads to inflation, unemployment, and a halt to growth.
That’s why debt management is a serious task—one that requires the RBI, the Finance Ministry, and the entire government to work together. And the public must understand that government borrowing determines our future.