Discuss the problem of intergenerational inequity arising out of internal public debt.

Understanding Intergenerational Inequity and Internal Public Debt

Intergenerational Equity refers to the fair allocation of resources and burdens between present and future generations. It implies that current policies should not compromise the ability of future generations to meet their own needs. Internal Public Debt, in contrast to external debt, is owed by the government to its own citizens – through instruments like government bonds, treasury bills, and small savings schemes.

Mechanisms of Intergenerational Inequity

1. Burden of Debt Repayment

The most direct form of inequity arises from the obligation of future generations to repay the principal and interest on current debt. Higher levels of debt necessitate higher taxes or reduced public spending in the future, effectively transferring the cost of present consumption to those who were not beneficiaries of that consumption. This is particularly problematic when debt is used to finance current consumption rather than productive investments.

2. Crowding Out Effect

High levels of internal debt can lead to the ‘crowding out’ of private investment. The government’s borrowing increases the demand for loanable funds, driving up interest rates. This makes it more expensive for private businesses to borrow and invest, hindering economic growth and reducing opportunities for future generations. A slower-growing economy translates to lower incomes and fewer resources available for future generations.

3. Reduced Fiscal Space for Future Investments

Servicing a large debt stock consumes a significant portion of the government’s revenue. This reduces the fiscal space available for crucial investments in areas like education, healthcare, infrastructure, and research & development – all of which are vital for improving the well-being of future generations. For example, increased interest payments on debt may force cuts in social sector spending, impacting human capital development.

4. Implicit Debt & Unfunded Liabilities

Beyond explicit debt, governments often have implicit liabilities, such as unfunded pension obligations or guarantees to public sector enterprises. These liabilities represent future claims on government resources and contribute to the overall burden on future generations. The rising pension burden in many developed countries is a prime example of this issue.

The Indian Context: Specific Concerns

India’s reliance on small savings schemes (like PPF, NSC) as a significant source of government borrowing creates unique challenges. While these schemes mobilize household savings, they often offer relatively high interest rates, increasing the cost of debt servicing. Furthermore, the implicit guarantee provided by the government on these schemes can create moral hazard and distort savings behavior.

The use of off-budget financing, where government liabilities are not fully reflected in the budget, also exacerbates the problem. This practice obscures the true extent of public debt and makes it difficult to assess the long-term fiscal implications. The UDAY scheme for discoms (2015) is an example where debt was transferred to state governments, impacting their fiscal health and potentially creating intergenerational burdens.

Mitigation Strategies

• Fiscal Consolidation: Implementing a credible fiscal consolidation path to reduce the debt-to-GDP ratio is crucial. This requires disciplined spending, increased revenue mobilization, and improved tax administration.
• Productive Investments: Prioritizing investments in infrastructure, education, and healthcare can boost long-term economic growth and enhance the productive capacity of future generations.
• Debt Management: Improving debt management practices, such as lengthening the maturity structure of debt and diversifying funding sources, can reduce the risk of debt distress.
• Transparency and Accountability: Enhancing transparency in public finances, including the disclosure of off-budget liabilities, is essential for informed decision-making and accountability.
• Reforms in Small Savings Schemes: Reviewing the interest rate structure of small savings schemes to align them with market rates can reduce the cost of borrowing for the government.