Public Debt and Disinvestment for UPSC

The Union and State governments in India borrow heavily to fund infrastructure, social welfare and everyday expenditure. While borrowing helps bridge fiscal deficits and smooth development spending, excessive debt burdens can crowd out private investment and strain future budgets through high interest payments. Understanding the composition of India's public debt, its sources and instruments, along with the policy of disinvestment and its relationship to privatisation, is essential for economics students and civil services aspirants. This article explains the fundamentals of public debt, current trends in market borrowing and sovereign gold bonds, and the rationale behind disinvestment versus privatisation. It also provides pointers for UPSC prelims and mains, quick facts, previous year questions, practice MCQs and FAQs.

Public debt composition

India's public debt is the combined debt of the Union and State governments. It includes both internal debt-borrowings within the country denominated in Indian rupees-and external debt-loans contracted in foreign currency. The debt stock grows each year when governments run fiscal deficits, and it is reduced through repayments or surplus budgets.

Central versus state debt

Public debt can be divided into debt of the central government and debt of the states. Historically, the Union government has accounted for about twothirds of general government debt, while state debts contribute roughly onethird of the total. State debt ratios vary significantly-from less than 20 per cent of state GDP in fiscally prudent states like Maharashtra and Gujarat to nearly 50 per cent in Punjab and Bihar. Rising subnational debt burdens have prompted calls for better fiscal discipline, as interest payments consume a growing share of state revenues and reduce spending room for health, education and climate adaptation.

Internal and external debt

Internal debt forms the vast majority of India's public debt. It comprises:

• Marketable debt: longterm dated securities (government bonds) and shortterm treasury bills issued through auctions to banks, insurance companies, mutual funds and individuals. These are tradable in the secondary market and form the bulk of government borrowing.
• Nonmarketable debt: treasury bills issued to state governments and special securities issued to the National Small Savings Fund, recapitalisation bonds issued to public sector banks, and other nonnegotiable instruments. These are not traded and usually carry concessional interest rates.
• Small savings, provident and other funds: liabilities arising from the Post Office Saving Bank, Public Provident Fund, Sukanya Samriddhi and Senior Citizen Savings Scheme. Government also raises funds through special deposit schemes for provident funds and pension funds of government employees.

External debt accounts for a small share-less than 4 per cent of total central government debt. It includes concessional loans from multilateral agencies like the World Bank and the Asian Development Bank, bilateral loans from other governments and commercial borrowings. External debt is denominated mainly in US dollars, Japanese yen, special drawing rights and euros. As of mid2025, India's total external debt stood at around USD 747 billion, with longterm debt forming the bulk and shortterm debt making up about 18 per cent. Roughly 30 per cent of the external debt stock is denominated in Indian rupees.

Latest figures and debt sustainability

According to the Union government's Receipt Budget for 2025-26, outstanding internal debt and other liabilities of the centre are estimated at around 175.6 lakh crore at the end of March 2025, rising to 190.1 lakh crore by March 2026. External debt is expected to increase from 6.18 lakh crore to 6.64 lakh crore over the same period. These figures translate to a general government debttoGDP ratio of roughly 57 per cent in 202425, projected to decline marginally to 56 per cent in 202526. Internal debt thus constitutes more than 93 per cent of the centre's public debt, while external debt forms a tiny proportion.

The Reserve Bank of India (RBI) manages the government's debt through its Public Debt Office. Debt sustainability depends on the size of the primary fiscal deficit (fiscal deficit minus interest payments) and the interest rate-growth rate differential. India has largely financed its deficits by tapping a captive market of banks, insurance companies, provident funds and the RBI, keeping rollover risks manageable. However, rising debt implies larger interest payments, crowding out productive expenditure and limiting fiscal space for development needs.

Table 1: Composition of central government debt

The following table summarises the key components of India's central government debt for 2024-25 (Revised Estimates). It highlights the dominance of internal borrowings in the debt portfolio.

Note: Figures are rounded off for easier recall. External debt is converted at historical exchange rates; thus the share appears low even though the absolute amount is significant.

Why high public debt matters

A high debt ratio is not inherently catastrophic if the economy grows faster than the interest rate and if investors continue to hold government securities. Yet, persistently high debt imposes several costs:

• Interest burden: Interest payments absorb a growing share of government revenue-nearly onefifth of the Union Budget in recent years-reducing funds available for social and capital expenditure.
• Limited fiscal space: High debt restricts the government's ability to respond to shocks such as recessions, natural disasters or pandemics. During crises, additional borrowing may invite rating downgrades and higher interest costs.
• Crowding out: When government borrows heavily, banks and other financial institutions hold a large portion of their assets in government bonds to satisfy statutory liquidity requirements. This can crowd out private credit and slow investment growth.
• Risk of contingent liabilities: Guarantees given to state governments, public sector undertakings and financial institutions may become actual liabilities, adding to the debt stock.
• Intergenerational equity: Excessive borrowing shifts the repayment burden to future generations, raising questions of fairness and sustainability.

Debt management reforms

India's legal framework for debt management includes Articles 292 and 293 of the Constitution, which empower Parliament to borrow on the security of the Consolidated Fund of India and permit states to borrow within limits. The Fiscal Responsibility and Budget Management (FRBM) Act sets longterm targets for fiscal deficit and debt, while the RBI Act authorises the central bank to issue government securities. Recent reforms aim to improve transparency and market depth by consolidating debt issuance, lengthening maturity profiles, introducing floating rate bonds and sovereign green bonds, and publishing a Status Paper on Government Debt regularly.

Market borrowings

Market borrowings refer to funds raised by the government through the sale of government securities (GSecs) and treasury bills. These instruments are traded in the bond market and constitute the largest component of public debt. The government announces a borrowing calendar at the start of each halfyear in consultation with the RBI's Debt Management Department.

Gross and net borrowings

Gross borrowings represent the total amount of money the government plans to raise during the year. Net borrowings subtract the repayment of past loans from gross borrowings; they reflect the additional debt added to the outstanding stock. For FY 2025-26, the Union Budget estimates gross market borrowing at about 14.82 lakh crore. Of this, the government plans to borrow 8 lakh crore in the first half (H1) and about 6.8 lakh crore in the second half (H2). Net market borrowings after redemptions are expected to be around 11.5 lakh crore. The borrowing calendar is structured to spread maturities, ensure predictable supply and maintain market stability.

Types of government securities

Market borrowings are made through several instruments:

• Government dated securities (GSecs): Longterm bonds with maturities ranging from 3 years to 40 years. They pay semiannual interest (coupon) and repay principal at maturity. The government issues both fixedrate and floatingrate bonds, including inflationindexed bonds and sovereign green bonds. In 2025-26 the issuance is spread across maturities to cater to different investor preferences.
• State development loans (SDLs): Bonds issued by individual state governments to finance their deficits. SDLs generally carry a slightly higher yield than central government securities and are traded in the secondary market. The RBI conducts SDL auctions and announces cutoff yields based on demand.
• Treasury bills: Shortterm instruments of 91, 182 and 364 days. They are issued at a discount and redeemed at face value. Weekly Tbill auctions raise around 19,000 crore in FY 2025-26-split among 91day, 182day and 364day tenors-and are used to meet shortterm cash mismatches.
• Cash Management Bills (CMBs): Ultrashortterm bills used for temporary liquidity requirements; they have maturities shorter than 91 days.
• Sovereign green bonds: Introduced in 2023-24, these bonds fund environmentally sustainable projects. FY 2025-26 includes a green bond issuance of 10,000 crore.

Borrowing calendar for FY 2025-26

For the first half of FY 2025-26, the government's borrowing calendar allocates:

• 3year bonds - around 5.3 % of total issuance
• 5year bonds - around 11.3 %
• 7year bonds - around 14 %
• 10year bonds - around 20.8 %
• 14year bonds - around 17 %
• 30year bonds - around 10.7 %
• 40year bonds - around 10.6 %

The borrowing plan aims to create a balanced maturity profile so that redemptions are spread out and refinancing risks are minimised. In addition, a greenshoe option allows the RBI to raise additional amounts if market demand is strong. This helps maintain liquidity and meet unanticipated expenditure.

Why market borrowings matter

Market borrowings have macroeconomic implications. A large supply of government bonds can put upward pressure on interest rates if demand is weak. However, India's financial system has a captive investor base: banks are required to hold a portion of their deposits in Statutory Liquidity Ratio (SLR) securities, insurance companies and provident funds are mandated to hold longdated government bonds, and the RBI can conduct Open Market Operations (OMO) to manage liquidity. These factors ensure stable demand and keep yields in check. Nonetheless, rising yields can make borrowing costlier for the private sector and dampen investment. The introduction of sovereign green bonds and floating rate instruments also broadens the investor base to include ESG funds and those seeking protection from rate volatility.

Sovereign Gold Bonds (SGBs)

In an effort to reduce domestic demand for physical gold and channel savings into financial assets, the government launched the Sovereign Gold Bond (SGB) Scheme in November 2015. These bonds are government securities denominated in grams of gold. Investors pay the issue price in rupees and receive the bonds in dematerialised or certificate form. On maturity, investors receive the equivalent market value of gold, thereby benefiting from changes in gold prices without storing physical gold.

Key features

The main features of SGBs are as follows:

• Maturity: 8 years, with an exit option after the 5th year on interest payment dates.
• Interest rate: Fixed rate of 2.5 % per annum, paid semiannually on the nominal value. This is in addition to the capital gain or loss linked to gold price movements.
• Denomination and limits: Denominated in one gram of gold, with a minimum subscription of 1 gram and maximum of 4 kg for individuals, 4 kg for Hindu Undivided Families (HUFs) and 20 kg for trusts and other institutions per financial year.
• Eligibility: Resident individuals, HUFs, trusts, universities and charitable institutions can invest. Nonresident Indians (NRIs) are not eligible to buy SGBs but can hold bonds issued while they were residents.
• Tax treatment: Interest is taxable as per the investor's slab, but capital gains on redemption at maturity are exempt from capital gains tax. Indexation benefits are available when bonds are sold on exchanges before maturity.

Current status of SGB issuances

Between 2015 and March 2025, the government issued 67 tranches of SGBs, collecting over 146 tonnes of gold worth approximately 72,000 crore. However, the scheme has been put on pause since February 2024 due to high international gold prices and rising interest costs. No new tranches were announced in FY 2024-25 or FY 2025-26, and the government has indicated that the scheme may be discontinued or restructured in the future. Investors continue to hold outstanding bonds, and the RBI provides a calendar for premature redemption of older tranches on each interest payment date. For instance, in 2025-26, tranches issued in 2016-17 will become eligible for early redemption at prevailing gold prices.

Advantages of SGBs

SGBs offer multiple benefits:

• They provide a hedge against inflation because returns are linked to gold prices.
• They generate regular income through the fixed interest rate, unlike physical gold which yields no interest.
• Investors avoid making charges, storage costs and security risks associated with jewellery.
• The bonds are tradable on stock exchanges and can be used as collateral for loans, enhancing liquidity.
• The scheme supports the government's objective of reducing the current account deficit by lowering physical gold imports.

Challenges and future prospects

Despite its advantages, the SGB scheme faces challenges:

• High gold prices and interest rates: When global gold prices are high, the government's cost of borrowing through SGBs increases because it guarantees redemption at prevailing prices. This was one reason for suspending new issuances in 2024-25.
• Lack of awareness: Many households in rural areas are unfamiliar with dematerialised gold instruments and still prefer physical gold for cultural reasons.
• Liquidity and taxation: Although bonds are tradable, secondary market volumes are low. Interest is fully taxable, which makes SGBs less attractive for investors in the highest tax brackets.

Going forward, the government may redesign the SGB scheme with variable interest rates or targeted subscription periods linked to gold prices. Educating investors about the benefits of paper gold and integrating SGBs into digital payment platforms could also improve uptake.

Disinvestment vs privatisation

Disinvestment refers to the sale of a portion of government equity in public sector enterprises (PSEs) to raise resources, promote wider ownership and improve corporate governance. Disinvestment can take the form of a minority stake sale through an initial public offering (IPO), followon public offer (FPO), offer for sale (OFS), buyback of shares, or sale of exchangetraded funds. A strategic disinvestment or privatisation occurs when the government sells a substantial stake along with management control to a private investor. The terms "disinvestment" and "privatisation" are sometimes used interchangeably, but they have distinct meanings.

Objectives of disinvestment

The Government of India has pursued disinvestment since the early 1990s with several goals in mind:

• Resource mobilisation: Proceeds help bridge fiscal deficits and finance infrastructure projects without raising taxes.
• Enhancing efficiency: Market discipline and private participation encourage PSEs to improve productivity, cut costs and innovate.
• Reducing administrative burden: Partial divestment allows ministries to focus on policy making rather than micromanaging commercial enterprises.
• Wider shareholding: Disinvestment promotes widespread participation of retail investors in wealth creation through PSE shares.
• Unlocking value: Selling stakes at the right time can unlock the true value of enterprises, especially when stock markets are buoyant.

Methods of disinvestment

Under the policy guidelines issued by the Department of Investment and Public Asset Management (DIPAM), disinvestment takes several forms:

• Initial Public Offering (IPO): A PSE is listed on a stock exchange by issuing new shares to the public and diluting the government's stake.
• Followon Public Offer (FPO): The government or the company offers additional shares to the public after being listed.
• Offer for Sale (OFS): The government sells its existing shares on the stock exchange, often through a twoday auction for institutional and retail investors.
• Strategic disinvestment: Sale of a substantial portion of government shareholding along with transfer of management control to a private buyer. Examples include the sale of Air India to the Tata Group in 2021 and the proposed sale of the government's 60.7 % stake in IDBI Bank jointly held with LIC.
• Buyback of shares: A PSE purchases its own shares from the government using its surplus cash, resulting in a reduced government stake.
• Exchange Traded Funds (ETFs): The government bundles shares of multiple PSEs into an ETF (such as the CPSE ETF and Bharat 22 ETF) and sells units to investors.

Comparison of disinvestment and privatisation

The table below summarises key differences between general disinvestment and outright privatisation:

Recent disinvestment performance

Disinvestment receipts have fluctuated in recent years. In FY 2023-24 the government raised about 16,507 crore, while in FY 2024-25 collections fell to just 9,319 crore-the lowest since the policy was introduced in the mid1990s. Recognising the difficulty of hitting ambitious targets, the government no longer sets annual receipts goals. For FY 2025-26, it has provisionally pegged disinvestment receipts at around 47,000 crore, but the focus is on value creation rather than headline numbers. The sale of a 1.6 % stake in Hindustan Zinc in November 2024 raised about 3,449 crore; smaller stake sales in GIC, Cochin Shipyard and other companies yielded additional proceeds. A major upcoming transaction is the strategic sale of IDBI Bank, where the government and LIC together hold 60.7 % and expect to conclude the sale by the end of FY 2025-26. The process has reached the stage of inviting financial bids, and potential buyers include Emirates NBD and Canadian investor Prem Watsa.

Benefits and concerns

Disinvestment and privatisation have clear benefits-raising resources, improving efficiency and freeing the government from the burden of managing commercial enterprises. Yet they also evoke concerns about job losses, strategic control of key sectors and transparency in valuation. To address these concerns, the government often includes clauses protecting employee interests for a defined period, retains a residual stake to signal commitment and uses competitive bidding with professional advisors to determine fair prices. The success of the Air India sale, which transferred full ownership to the Tata Group for 18,000 crore while the buyer assumed 15,300 crore of debt, shows that strategic sales can revive lossmaking entities and deliver better service quality. On the other hand, prolonged delays in proposed strategic sales-such as that of Bharat Petroleum-highlight challenges in valuation, regulatory approvals and bidder appetite.

Way forward

Going forward, the disinvestment policy is likely to shift from achieving shortterm revenue targets to a longerterm "value unlocking" strategy. This includes:

• Identifying core and noncore PSEs and prioritising strategic sales where the government has no business being in commercial activities.
• Strengthening corporate governance at PSEs to boost valuations before sale.
• Developing deep domestic capital markets to absorb large share sales without destabilising prices.
• Ensuring transparent processes and timely approvals to attract quality bidders.
• Using disinvestment proceeds to retire debt and invest in social and infrastructure sectors, rather than financing routine expenditure.

Prelims vs Mains: How to prepare

Quick Facts

• General government debttoGDP ratio (2024-25): ~57 %; projected to decline slightly in 2025-26.
• Share of internal debt in central government debt: over 93 %.
• Gross market borrowing target for FY 2025-26: 14.82 lakh crore; net borrowing ~ 11.5 lakh crore.
• Sovereign Gold Bond interest rate: 2.5 % per annum; tenure 8 years with exit after 5 years.
• Disinvestment receipts FY 2024-25: 9,319 crore (lowest since 2014-15).
• Provisional disinvestment target FY 2025-26: 47,000 crore.
• Planned strategic sale: 60.7 % stake in IDBI Bank (government + LIC) to conclude by end of FY 2025-26.
• State share in public debt: roughly onethird of general government debt; some states have debttoGSDP ratios nearing 50 %.

UPSC Previous Year Questions (Selected)

The following questions are paraphrased from recent UPSC examinations. Use them to gauge how public debt and disinvestment topics appear in the exam.

1. What is the difference between internal public debt and external public debt? Which of the two is more sustainable for a developing country like India?
   Answer: Internal debt is borrowed domestically in rupees and usually held by residents, while external debt is contracted in foreign currency from external lenders. Internal debt is generally more sustainable because it can be repaid in domestic currency and is subject to local monetary control, whereas external debt exposes the country to exchange rate risks.
2. Discuss the significance of the Fiscal Responsibility and Budget Management (FRBM) Act in maintaining India's debt sustainability.
   Answer: The FRBM Act sets targets for fiscal deficit and debt-to-GDP ratios, mandates transparency in fiscal operations and requires the government to present medium-term fiscal policy statements. It thus acts as a rulebased framework to prevent excessive borrowing and ensure intergenerational equity.
3. Explain how disinvestment of public sector enterprises can contribute to fiscal consolidation. What are the potential risks associated with this strategy?
   Answer: Disinvestment raises nondebt receipts that can be used to reduce fiscal deficit or fund capital expenditure. It can also improve efficiency of enterprises under private management. Risks include undervaluation of assets, loss of strategic control, job insecurity for employees and political opposition.
4. The government has paused the issuance of Sovereign Gold Bonds (SGBs) in recent years. What factors led to this pause and how might the scheme evolve?
   Answer: High international gold prices and rising interest costs increased the government's liability on SGBs, prompting a pause in new tranches. The scheme may be redesigned with variable interest rates or targeted subscription windows to reduce cost and align with market conditions.

Practice MCQs

Attempt the following multiplechoice questions to test your understanding. The answer key is provided after the questions.

1. Internal public debt of India consists mainly of:
   1. Grants from foreign governments and multilateral agencies
   2. Loans raised in the domestic market through government securities and treasury bills
   3. Foreign direct investment in public sector undertakings
   4. Accumulated current account surplus
2. The gross market borrowing target of the Union government for FY 2025-26 is approximately:
   1. 8 lakh crore
   2. 11.5 lakh crore
   3. 14.8 lakh crore
   4. 19 lakh crore
3. Which of the following statements about Sovereign Gold Bonds (SGBs) is incorrect?
   1. SGBs pay a fixed interest rate in addition to capital appreciation linked to gold prices.
   2. SGBs are issued by the Reserve Bank of India on behalf of the Government of India.
   3. SGBs can be purchased by nonresident Indians (NRIs) without restrictions.
   4. Capital gains tax is exempt on redemption of SGBs at maturity.
4. Disinvestment differs from privatisation because:
   1. Disinvestment always involves the transfer of management control.
   2. Privatisation means selling a minority stake while retaining control.
   3. Disinvestment is primarily aimed at raising resources and widening share ownership, whereas privatisation entails transfer of ownership and control.
   4. Both terms mean the same thing in the Indian context.
5. Which statement regarding India's public debt is correct?
   1. External debt constitutes more than half of India's public debt.
   2. States account for about onethird of general government debt.
   3. The debttoGDP ratio is rising rapidly and exceeds 90 %.
   4. Interest payments constitute less than 5 % of government expenditure.

Answer Key: 1B, 2C, 3C, 4C, 5B.

Frequently Asked Questions

Below are answers to common questions about public debt and disinvestment in simple terms. For more indepth understanding, refer to the sections above.

What is public debt?

Public debt is the total amount owed by the central and state governments to domestic and foreign lenders. It includes market borrowings, treasury bills, small savings liabilities, external loans and other obligations.

Who manages the government's debt in India?

The Reserve Bank of India (RBI) manages the central government's debt through its Public Debt Office. It conducts auctions of government securities, treasury bills and sovereign gold bonds, and ensures smooth redemption and servicing of debt. State debt is also managed by the RBI under separate agreements.

How is internal debt different from external debt?

Internal debt is borrowed within the country in Indian rupees, typically from banks, insurance companies, provident funds and individual investors. External debt is borrowed in foreign currencies from multilateral agencies, foreign governments or commercial lenders. Internal debt can be repaid with domestic resources, whereas external debt depends on foreign exchange availability and is subject to exchange rate risk.

Why has the government paused SGB issuances?

New SGB issuances have been paused since early 2024 because international gold prices have increased sharply, making it expensive for the government to guarantee redemption at future prices. High interest rates also raise the cost of servicing SGBs. Authorities are reviewing the scheme to ensure it remains sustainable.

Does disinvestment always lead to privatisation?

No. Disinvestment can involve selling a small portion of government shares while retaining management control. Privatisation or strategic disinvestment occurs only when a majority stake and control are transferred to a private buyer. Both policies aim to improve efficiency and unlock value, but their extent and consequences differ.

How will the sale of IDBI Bank impact the banking sector?

The proposed sale of 60.7 % stake in IDBI Bank to a strategic investor is expected to bring fresh capital, modernise management and enhance competitiveness. It will also reduce the government's fiscal burden and set a precedent for divesting stakes in other public sector banks. However, regulators will ensure that the new owner adheres to prudential norms and safeguards depositors' interests.

What happens to employees when a PSE is privatised?

In strategic sales, bidding documents usually require the buyer to retain employees for a specified period and honour existing service contracts. Over time, the new management may rationalise staff or renegotiate terms, but retrenchment is subject to labour laws and negotiated settlements. In minority stake sales, there is generally no impact on employment.

Why are disinvestment receipts declining even when the stock market is buoyant?

Delays in finalising transactions, legal hurdles, valuation differences and market volatility often hamper large stake sales. Many prospective buyers hesitate to invest in capitalintensive sectors without clarity on regulatory frameworks. The government has therefore shifted towards a valuecreation strategy rather than chasing high annual targets.