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
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
Upto 1867: when public debt was driven largely by needs of financing
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.