Sunday, 22 May 2011

Different forms of Borrowing and why government borrows the loan and discuss its role in economic stability

The sum of money which a government borrows from inside or outside the country to utilize the natural resources of the country or to meet emergency requirements is called national debt or public debt. If differs from the private debt. Government borrows the money for the welfare of the citizens while an individual uses it for personal profit.


Following are the different forms of public debt :

1. Internal Debt :-
A government can also borrow the money from inside the country. The public and financial institutions provide loan to the government. In the normal period state can borrow only surplus funds which are lefty with the business.

2. External Loans :-
These loans are provided from other states and international agencies like International Monetary Fund. External loans also depend upon the sound economic condition of the borrowing country. Foreign countries advance loan if taxable capacity of the national and rate of production is high.


1. Deficit in Budget :-
Sometimes government expenditure increases than the revenue, so government fills the gap by borrowing the money.

2. Development Plans :-
Today less developing countries are making plans to improve their economic condition. A huge amount of capital is needed for the new projects. So government borrows the money to meet the requirements .

3. Emergency Needs :-
Sometimes a country has to wage a war , so money has to be borrowed on a large scale in order meet the requirements.

4. Repayment of Debt :-
Sometimes government borrows the money to repay the previous debt.

5. To Control Deflation :-
Sometimes there is a deficiency in aggregate demand, income, output and in employment. The state borrows the money to fill the gap between saving and expenditure. By increasing investment it removes the gap.


Sometimes it has been stated that public debt is a curse for the nation. But nothing is good or bad with the debts. It depends upon the various factors like use of debt and rate of interest. In order to examine the economic effects of public debt, we will have to examine the following matters :

1. The Quantity of Loan :-
If the economy is functioning at the level of full employment then a small amount of loan will also create inflationary pressure in the country. If the quantity of loan is greater than rate of inflation will also be higher.

2. Purpose of Debt :-
If the loan is used for the productive purpose in the period of depression it will increase the income,employment, and production in the country. On the other hand if loan is used for unproductive purpose like war, it will lead to instability in the country.

3. Nature of Internal and External Debt :-
Debt is internal or external it is a burden on the nation. But the nature of both debts differ from each other. In case of foreign loan interest is also paid with the loan. If it is used for economic development it will have a healthy effect on the country. If internal loan is used for the consumption purposes. It leads to inflation. On the other hand if it is used for the productive purpose then it can increase the income and employment.

4. Rate of Interest :-
If the debt is borrowed at a higher rate of interest, it will take away a major portion of income for its repayment and economic stability of the country will be affected adversely.


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