Debt refers to borrowing by a government from within the country or from abroad, from private individuals or association of individuals or from banking and non-banking financial institutions. Debt is of three types: internal and external, productive and unproductive, short-term and long-term.

Internal debt is raised from within the country and external debt is owed to foreigners or foreign governments or institutions. The productive debt is expected to create assets, which will yield income sufficient to pay the principal and interest on the loan. In other words, they are expected to pay their way; they are self-liquidating. On the other hand, loans raised for war do not create any assets; they are a dead weight and are regarded as unproductive. Short-term loans are repayable after short interval of time. They are intended to bridge the gap temporarily between current revenue and current expenditure. It is called floating debt. Long-term loans are payable after a long time covering several years. They are also called funded debt.

Borrowing by a public authority is a modern practice. In the past, whenever there was an emergency, usually a war, the monarch relied on hoarded wealth or borrowed on his own personal credit. Books of history abound with instances of fabulous hoards and accounts of sacks of hoarded wealth either from the king’s treasuries or from temples and churches. But this method of finance is not suited to modern conditions. It is inadequate and uneconomical.

The increase in debt also occurs due to fairly frequent budget deficits on current accounts. The deficits arise from the necessity of maintaining full economic activity in economies which may have ceased to expand. Increase in debt is also due to the undertaking of welfare schemes by governments in modern times. In public utilities, where there is no conventional profit check, no tight control over costs can be maintained and there are more losses than gains. They also add to the weight of public debt.