Debt Management in India, Power Point Presentation

1.  Kiran Babu
 Sinto K A
 Syam Prasad
 Vishnu Menon
 Sreelatha S Nair
SOP 18, MBA 11-13 B

3. “ 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
SOP 18, MBA 11-13 B

4.  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
economy
SOP 18, MBA 11-13 B

5. 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
SOP 18, MBA 11-13 B

6.  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
SOP 18, MBA 11-13 B

7.  To maintain government‟s economic policy:-
Helps to raise the purchasing power and
effective demand in depression period & vice-
versa 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.
SOP 18, MBA 11-13 B

8. 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.
SOP 18, MBA 11-13 B

9.  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
SOP 18, MBA 11-13 B

10.  Low interest obligation.
 Preference pattern of investors.
 Optimal maturity structure.
 Monetization of debt.
 Maintenance of interest rate
 Anti- cyclical use of debt
SOP 18, MBA 11-13 B

11.  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
SOP 18, MBA 11-13 B

12.  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
SOP 18, MBA 11-13 B

13.  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.
SOP 18, MBA 11-13 B

14.  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.
SOP 18, MBA 11-13 B

15.  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
SOP 18, MBA 11-13 B

16.  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 inSOP 18, MBA 11-13 B

17.  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
SOP 18, MBA 11-13 B

18. SOP 18, MBA 11-13 B

19.  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
SOP 18, MBA 11-13 B

20.  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
SOP 18, MBA 11-13 B

21.  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.
SOP 18, MBA 11-13 B

22.  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
SOP 18, MBA 11-13 B

23.  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
SOP 18, MBA 11-13 B

24.  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.
SOP 18, MBA 11-13 B

25.  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
SOP 18, MBA 11-13 B

26. SOP 18, MBA 11-13 B

27. SOP 18, MBA 11-13 B

28. SOP 18, MBA 11-13 B

29. TWO CONCEPTS:
 PAY AS YOU USE FINANCE
 PAY AS YOU GO FINANCE
SOP 18, MBA 11-13 B

30. • 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
SOP 18, MBA 11-13 B

31.  CURRENT BUDGET AND CAPI TAL BUDGET
ACCOUNTS
 CURRENT BUDGET – TAX FI NANCED
 CAPI TAL BUDGET – LOAN FI NANCED
SOP 18, MBA 11-13 B

32. CURRENT
BUDGET
CAPITAL
BUDGET
RECEIPTS EXPENDITURES RECEIPTS EXPENDITURE
a) TAXES
b) OTHERS
a)Expenditure for
current benefits
b)Interest amount
a)Sale of asset
b)Net borrowings
a)Expenditure for
future benefits
b)Net increase in
provision for
future benefits
c)Other current
expenditures
c)Net increase in
provisions for
future benefits
SOP 18, MBA 11-13 B

33.  CONTRIBUTORY AND QUID PRO BASIS
 PROHIBITS BORROWING
 FOCUSSES ON LIMITING CURRENT
EXPENDITURES TO CURRENT
RECEIPTS
 OBSERVED AS AN IDEAL FISCAL
POLICY BY LOCAL GOVERNMENTS
SOP 18, MBA 11-13 B

34.  SECURING A SATISFACTION COORDINATION
BETWEEN TREASURY’S DEBT MANAGEMENT
AND CENTRAL BANK’S MONETARY POLICY
 THREE APPROACHES:
*POSITIVE MANAGEMENT
*NEUTRAL MANAGEMENT
*NEGATIVE MANAGEMENT
SOP 18, MBA 11-13 B

35.  ACCORDING TO THIS CONCEPT:
 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.
SOP 18, MBA 11-13 B

36.  DOES’NT 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
SOP 18, MBA 11-13 B

37.  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
SOP 18, MBA 11-13 B

38.  MINIMUM INTEREST COST PRINCIPLE –
Not adequate
 GOVERNMENT CONTROL OVER MONEY
SUPPLY
 DEBT MONETISATION
 Lengthening the debt
SOP 18, MBA 11-13 B

39.  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
SOP 18, MBA 11-13 B

40.  Extent of govt. regulation of foreign debt
 Appropriate composition of debt
SOP 18, MBA 11-13 B

41.  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‟
SOP 18, MBA 11-13 B

42. SOP 18, MBA 11-13 B

43. SOP 18, MBA 11-13 B