Budget Faqs: What Is Government Borrowing?

The Union Budget is the most important executive document published by the government of India each year. The Budget lays down the status of the government’s financials and also provides information about what areas it will be focusing on.

But it also showcases the health of the government treasury, exactly how much the government is bringing against its expenses. One of the important ways that the government meets its expenses is through government borrowing.

Most nations in modern times choose to take on debt for a variety of reasons, like economic stimulation and stabilisation, accelerating capital expenditure etc. Since the national economy often grows faster than the interest on the debt, most governments don’t increase their debt obligation when borrowing money.

The government borrows money in the form of debt. The government issues government securities called G-secs and Treasury Bills. Investors, financial institutions, companies, and even other governments in some cases can purchase these securities. This initial purchase gives the government the money that it seeks to borrow.

 

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But like any other debt, the government is also on the hook for paying for the public debt with interest. The government promises to pay the initial principal along with interest upon the maturity of the security, though some securities also offer a periodic coupon or interest payments.

Just like other securities, rating agencies also rate these government borrowing instruments.

These payments often form a significant portion of the government’s fiscal deficit–the deficit between the government’s expenditure and revenue in a year. This information can be found under the Capital Receipts within the budget document.

Governments try to keep their fiscal deficit in check by consolidating their past debt obligations, which itself is often referenced in terms of a percentage of the national GDP to understand its real scale.

First Published: IST

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