Debt refers to borrowing by a government from within the country or
from abroad, from private individuals or association of individuals or
from banking and non-banking financial institutions. Debt is of three
types: internal and external, productive and unproductive, short-term
and long-term.
Internal debt is raised from within the country
and external debt is owed to foreigners or foreign governments or
institutions. The productive debt is expected to create assets, which
will yield income sufficient to pay the principal and interest on the
loan. In other words, they are expected to pay their way; they are
self-liquidating. On the other hand, loans raised for war do not create
any assets; they are a dead weight and are regarded as unproductive.
Short-term loans are repayable after short interval of time. They are
intended to bridge the gap temporarily between current revenue and
current expenditure. It is called floating debt. Long-term loans are
payable after a long time covering several years. They are also called
funded debt.
Borrowing by a public authority is a modern
practice. In the past, whenever there was an emergency, usually a war,
the monarch relied on hoarded wealth or borrowed on his own personal
credit. Books of history abound with instances of fabulous hoards and
accounts of sacks of hoarded wealth either from the king?s treasuries
or from temples and churches. But this method of finance is not suited
to modern conditions. It is inadequate and uneconomical.
The
increase in debt also occurs due to fairly frequent budget deficits on
current accounts. The deficits arise from the necessity of maintaining
full economic activity in economies which may have ceased to expand.
Increase in debt is also due to the undertaking of welfare schemes by
governments in modern times. In public utilities, where there is no
conventional profit check, no tight control over costs can be
maintained and there are more losses than gains. They also add to the
weight of public debt.
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