Government market borrowings, loans and grants

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Government Market Borrowings, loans and grants

There are two types of borrowings :

  • Internal borrowings
  • External borrowings

There is third mean of public loan i.e. other liabilities

Internal borrowings

Internal debt or domestic debt is the part of the total government debt in a country that is owed to lenders within the country. Internal debt’s complement is External Debt. Commercial Banks, other financial institutions etc. constitute the sources of funds for the internal debts.

Internal Public Debt owed by a government (Money a government borrows from its citizens) is part of the country’s national debt. It is a form of fiat creation of money, in which the government obtains finance not by creating it de novo, but by borrowing it. The money created is in the form of treasury securities or securities borrowed from the central bank.

External borrowings

External debt is the portion of a country’s debt that was borrowed from foreign lenders including commercial banks, governments or international financial institutions. These loans, including interest, must usually be paid in the currency in which the loan was made. In order to earn the needed currency, the borrowing country may sell and export goods to the lender’s country.

A debt crisis can occur if a country with a weak economy is not able to repay external debt due to the inability to produce and sell goods and make a profitable return. The International Monetary Fund (IMF) is one of the agencies that keep track of the country’s external debt. The World Bank publishes a quarterly report on external debt statistics.

If a nation is unable or refuses to repay its external debt, it is said to be in sovereign default. This can lead to the lenders withholding future releases of assets that might be needed by the borrowing nation. Such instances can have a rolling effect, wherein the borrower’s currency collapses and that nation’s overall economic Growth is stalled.

External debt, particularly tied loans, might be set for specific purposes that are defined by the borrower and lender. Such financial aid could be used to address humanitarian or disaster needs. For example, if a nation faces severe famine and cannot secure emergency food through its own Resources, it might use external debt to procure food from the nation it received the tied loan from. If a country needs to build up its energy Infrastructure-2/”>INFRASTRUCTURE it might leverage external debt as part of an agreement to buy resources such as the material to construct power Plants in underserved areas.

Multilateral debt is the money India owes to international financial institutions such as the Asian Development Bank (ADB), the International Development Association (IDA), the International Bank for Reconstruction and Development (IBRD), the International Fund for Agricultural Development (IFAD) and others. Borrowing from the International Monetary Fund (IMF) are not included under multilateral debt, and are instead classified separately under the IMF head. As on 31 December 2017, India had a total multilateral debt of $56,021 million. The country’s major creditors are the IDA (53%), ADB (25.3%), and IBRD (20.4%). The IFAD and a few other multilateral creditors hold the remaining portion of the multilateral debt.

Bilateral debt is the money India owes to foreign governments. As on 31 December 2017, India had a total bilateral debt of $ 23,371 million. About 79.7% of the total bilateral debt is owed to Japan. Germany (10.9%), Russia (5.3%), France (3.3%), and the United States (0.7%) are other major creditors of India. The remaining 3.1% is owed to various other governments.

Other liabilities

It includes other interest bearing obligations of the government such as:

  • Post office Savings deposits under small saving schemes, loans raised through post office cash certificates, etc.
  • provident funds,
  • interest bearing reserve funds of departments like railways and telecommunications, etc.

The obligations of ‘other liabilities’ are met by the Public Account, just as the internal and external debts are secured under the Consolidated Fund. ‘

In 2017 India public debt was 1,896,129 million dollars, has increased 43,009 million since 2016.  This amount means that the debt in 2018 reached 69.79% of India GDP, a 0.05 Percentage point fall from 2017, when it was 69.84% of GDP.

India per capita debt in 2018 was 1,416 dollars per inhabitant. In 2017 it was 1,384 dollars, afterwards rising by 32 dollars, and if we again check 2008 we can see that then the debt per person was 781 dollars .  The position of India, as compared with the rest of the world, has improved in 2018 in terms of GDP percentage. Currently it is country number 139 in the list of debt to GDP and 69 in debt per capita, out of the 186.

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Government Market Borrowings

Government market borrowings are a way for governments to raise money to finance their operations. The most common Types of government market borrowings are Treasury Bills, Treasury notes, Treasury Bonds, federal agency securities, and state and local Government Securities.

Treasury bills are short-term debt instruments that mature in one year or less. They are issued at a DISCOUNT to their face value and are redeemed at face value on the maturity date. Treasury notes are intermediate-term debt instruments that mature in two to ten years. They are issued at a discount to their face value and are redeemed at face value on the maturity date. Treasury bonds are long-term debt instruments that mature in more than ten years. They are issued at a discount to their face value and are redeemed at face value on the maturity date. Federal agency securities are debt instruments issued by government-sponsored enterprises (GSEs) and other federal agencies. GSEs are privately owned companies that were created by the federal government to provide credit to certain sectors of the economy. Other federal agencies include the Department of the Treasury, the Department of Housing and Urban Development, and the Department of agriculture. State and Local Government securities are debt instruments issued by state and local governments. These securities are used to finance a variety of projects, such as schools, roads, and bridges.

Loans

Loans are a way for governments to provide financial assistance to individuals, businesses, and other governments. The most common types of government loans are direct loans and guaranteed loans.

Direct loans are loans that are made directly by the government. The government is the lender and the borrower is the recipient of the loan. Guaranteed loans are loans that are made by private lenders but are guaranteed by the government. The government is not the lender, but it guarantees to repay the loan if the borrower defaults.

Grants

Grants are a way for governments to provide financial assistance to individuals, businesses, and other governments without requiring repayment. The most common types of government grants are Discretionary Grants, mandatory grants, block grants, formula grants, and project grants.

Discretionary grants are grants that are awarded by the government at its discretion. The amount of money that is available for discretionary grants is determined by the annual budget process. Mandatory grants are grants that are required by law to be awarded by the government. The amount of money that is available for mandatory grants is determined by the law that created the grant program. Block grants are grants that are awarded to states or other governments for a broad purpose, such as Education or Health care. The states or other governments then have the flexibility to use the money for a variety of programs within that broad purpose. Formula grants are grants that are awarded to states or other governments based on a formula that takes into account factors such as Population, POVERTY rate, and Unemployment rate. Project grants are grants that are awarded to individuals, businesses, or other organizations for specific projects, such as research or Infrastructure Development.

Government market borrowings, loans, and grants are all important tools that governments use to finance their operations and provide financial assistance to individuals, businesses, and other governments.

Government market borrowings

  • What is government market borrowing?

Government market borrowing is the process by which the government raises money by selling bonds to investors.

  • Why does the government need to borrow money?

The government needs to borrow money to finance its spending, which is more than its revenue.

There are two main types of government bonds: Treasury bills and Treasury notes. Treasury bills are short-term bonds that mature in one year or less. Treasury notes are medium-term bonds that mature in two to ten years.

  • How do I buy government bonds?

You can buy government bonds through a broker or directly from the government.

  • What are the risks of investing in government bonds?

The main risk of investing in government bonds is that the government may default on its debt. However, this is a very rare event.

  • What are the benefits of investing in government bonds?

Government bonds are considered to be a safe Investment because the government is unlikely to default on its debt. They also offer a fixed rate of return, which can provide stability in your investment portfolio.

Loans

  • What is a loan?

A loan is a sum of money that is borrowed from a lender and must be repaid with interest.

  • What are the different types of loans?

There are many different types of loans, including personal loans, car loans, student loans, and mortgages.

  • How do I get a loan?

To get a loan, you will need to apply to a lender. The lender will review your application and decide whether to approve you for a loan. If you are approved, you will be given a loan agreement that outlines the terms of the loan, such as the interest rate, repayment schedule, and fees.

  • What are the risks of taking out a loan?

The main risk of taking out a loan is that you may not be able to repay it. If you default on your loan, the lender may take legal action to collect the debt.

  • What are the benefits of taking out a loan?

Loans can be used to finance a variety of expenses, such as buying a car, paying for college, or starting a business. Loans can also be used to consolidate debt or improve your credit score.

Grants

  • What is a grant?

A grant is a sum of money that is given to an individual or organization without having to repay it.

  • What are the different types of grants?

There are many different types of grants, including government grants, foundation grants, and corporate grants.

  • How do I get a grant?

To get a grant, you will need to apply to a grantmaker. The grantmaker will review your application and decide whether to award you a grant. If you are awarded a grant, you will be given a grant agreement that outlines the terms of the grant, such as the amount of the grant, the purpose of the grant, and the reporting requirements.

  • What are the risks of taking out a grant?

The main risk of taking out a grant is that you may not be able to meet the terms of the grant agreement. If you fail to meet the terms of the grant agreement, you may be required to repay the grant or face other penalties.

  • What are the benefits of taking out a grant?

Grants can be used to finance a variety of expenses, such as research, education, and community development. Grants can also be used to start a business or cover the costs of living.

Sure, here are some MCQs on the following topics:

  • Government revenue

Government revenue is the money that the government collects from taxes, fees, and other sources. It is used to fund government programs and Services.

  1. Which of the following is not a source of government revenue?
    (A) Taxes
    (B) Fees
    (C) Loans
    (D) Grants

  2. The largest source of government revenue in the United States is:
    (A) Income taxes
    (B) Sales taxes
    (C) Property taxes
    (D) Corporate taxes

  3. The government uses revenue to fund:
    (A) Programs and services
    (B) Debt repayment
    (C) Investment
    (D) All of the above

  4. Government expenditure

Government expenditure is the money that the government spends on goods and services, Transfer Payments, and interest payments.

  1. Which of the following is not a type of government expenditure?
    (A) Goods and services
    (B) Transfer payments
    (C) Interest payments
    (D) Loans

  2. The largest type of government expenditure in the United States is:
    (A) Social Security
    (B) Medicare
    (C) Medicaid
    (D) Defense

  3. The government spends money on:
    (A) Goods and services
    (B) Transfer payments
    (C) Interest payments
    (D) All of the above

  4. Government debt

Government debt is the total amount of money that the government owes to its creditors.

  1. Which of the following is not a way that the government can finance its debt?
    (A) Taxes
    (B) Borrowing
    (C) Printing money
    (D) Selling assets

  2. The government’s debt is financed by:
    (A) Taxes
    (B) Borrowing
    (C) Printing money
    (D) Selling assets

  3. The government’s debt is a problem because:
    (A) It can lead to Inflation
    (B) It can lead to higher interest rates
    (C) It can lead to a loss of confidence in the government
    (D) All of the above

  4. Government budget deficit

A government budget deficit is the amount of money that the government spends in a given year that is more than the amount of money that it collects in taxes and other revenue.

  1. Which of the following is not a way that the government can close a budget deficit?
    (A) Raise taxes
    (B) Cut spending
    (C) Borrow money
    (D) Sell assets

  2. The government’s budget deficit is a problem because:
    (A) It can lead to inflation
    (B) It can lead to higher interest rates
    (C) It can lead to a loss of confidence in the government
    (D) All of the above

  3. The government’s budget deficit is financed by:
    (A) Taxes
    (B) Borrowing
    (C) Printing money
    (D) Selling assets