 |
 |
 |
 |
| An early debt instrument issued
by the East India Company |
An early debt instrument issued
by the East India Company |
A Government Promissory Note
issued by the Princely State of Travancore |
A Government Stock Certificate
Issued by the Princely State of Hyderabad |
Towards the eighteenth century, the borrowing needs
of Indian Princely States were largely met by Indigenous bankers
and financiers. The concept of borrowing from the public in India
was pioneered by the East India Company to finance its campaigns
in South India (the Anglo French wars) in the eighteenth century.
The debt owed by the Government to the public, over time, came
to be known as public debt. The endeavours of the Company to establish
government banks towards the end of the 18th Century owed in no
small measure to the need to raise term and short term financial
accommodation from banks on more satisfactory terms than they
were able to garner on their own. The incentive to set up Government
banks (read central banks), had a lot to do with debt management.
Public Debt, today, is raised to meet the Governments
revenue deficits (the difference between the income of the government
and money spent to run the government) or to finance public works
(capital formation). Borrowing for financing railway construction
and public works such irrigation canals was first undertaken in
1867. The First World War saw a rise in India's Public Debt as
a result of India's contribution to the British exchequer towards
the cost of the war. The provinces of British India were allowed
to float loans for the first time in December, 1920 when local
government borrowing rules were issued under section 30(a) of
the Government of India Act, 1919. Only three provinces viz.,
Bombay, United Provinces and Punjab utilised this sanction before
the introduction of provincial autonomy. Public Debt was managed
by the Presidency Banks, the Comptroller and Auditor-General of
India till 1913 and thereafter by the Controller of the Currency
till 1935 when the Reserve Bank commenced operations.
Interest rates varied over time and after the uprising
of 1857 gradually came down to about 5% and later to 4% in 1871.
In 1894, the famous 3 1/2 % paper was created which continued
to be in existence for almost 50 years. When the Reserve Bank
of India took over the management of public debt from the Controller
of the Currency in 1935, the total funded debt of the Central
Government amounted to Rs 950 crores of which 54% amounted to
sterling debt and 46% rupee debt and the debt of the Provinces
amounted to Rs 18 crores.
Broadly, the phases of public debt in India could
be divided into the following phases.
Upto 1867: when
public debt was driven largely by needs of financing campaigns.
1867- 1916: when
public debt was raised for financing railways and canals and other
such purposes.
1917-1940: when
public debt increased substantially essentially out of the considerations
of
1940-1946: when
because of war time inflation, the effort was to mop up as much
a spossible of the current war time incomes
1947-1951: represented
the interregnum following war and partition and the economy was
unsettled. Government of India failed to achieve the estimates
for borrwings for which credit had been taken in the annual budgets.
1951-1985: when
borrowing was influenced by the five year plans.
1985-1991: when
an attempt was made to align the interest rates on government
securities with market interest rates in the wake of the recommendations
of the Chakraborti Committee Report.
1991 to date: When
comprehensive reforms of the Government Securities market were
undertaken and an active debt management policy put in place.
Ad Hoc Treasury bills were abolished; commenced the selling of
securities through the auction process; new instruments were introduced
such as zero coupon bonds, floating rate bonds and capital indexed
bonds; the Securities Trading Corporation of India was established;
a system of Primary Dealers in government securities was put in
place; the spectrum of maturities was broadened; the system of
Delivery versus payment was instituted; standard valuation norms
were prescribed; and endeavours made to ensure transparency in
operations through market process, the dissemination of information
and efforts were made to give an impetus to the secondary market
so as to broaden and deepen the market to make it more efficient.
As at the end of March, 2003, it is estimated that
the combined outstanding liabilities of the centre and state governments
amounted to Rs 18 trillion which worked out to over 75 percent
of the country's gross domestic product (GDP). In India and the
world over, Government Bonds have, from time to time, have not
only adopted innovative methods for rasing resources (legalised
wagering contracts like the Prize Bonds issued in the 1940s and
later 1950s in India) but have also been used for various innovative
schemes such as finance for development; social engineering like
the abolition of the Zamindari system; saving the environment;
or even weaning people away from gold (the gold bonds issued in
1993).
Normally the sovereign is considered the best risk
in the country and sovereign paper sets the benchmark for interest
rates for the corresponding maturity of other issuing entities.
Theoretically, others can borrow at a rate above what the Government
pays depending on how their risk is perceived by the markets.
Hence, a well developed Government Securities market helps in
the efficient allocation of resources. A country’s debt
market to a large extent depends on the depth of the Government’s
Bond Market. It in in this context that the recent initiatives
to widen and deepen the Government Securities Market and to make
it more efficient have been taken.
 |
 |
 |
| Premium Prize Bonds issued by Government of
India |
The Finance Minister inaugurating the Premium
Prize Bonds |
The Bihar Zamindari Abolition Compensation Bonds represented
the use of Government Bonds to help undertake social engineering
initiatives. |