Government Borrowing

It is also called public debt. It refers to the loans raised by the government from
various sources. The government raises public debt if its revenue is insufficient to
meet the expenditure requirements. It is also policy tool to control inflation and
to maintain BOP.

It is of two types: Internal borrowing and external borrowing.
1. Internal borrowing: It refers to the loans raised by the government from
inside the country. The government may borrow internally from individuals,
businesses and banks. It is useful to meet expenditure requirements and also
to control inflation. Its demerits is that when government borrows internally,
then less fund is available for private sector investment.
2. External borrowing: It refers to the loans raised by the government from
foreign sources. The sources of external borrowing are foreign nations,
international institutions like World Bank, Asian Development Bank, IMF and
other agencies and foreign people. It is an important source to finance capital
expenditure and to maintain favorable BOP. Its demerit is that it increases
foreign dependency.