Question

Mention two reasons responsible for borrowing by the government.

Discuss four reasons for the internal borrowing by the government.

Give two reasons each for resorting to internal borrowing by the government.

Explain the reasons for borrowing by the government.

Answer 1

1. To Meet Budget Deficits: To cover its current revenue expenditures, the government occasionally takes out loans. Because its present revenue is less than its expenses, it may borrow money. The money received from taxes and other sources of income frequently doesn’t cover all of its current expenses. In these situations, the government needs short-term loans to bridge the gap between its present earnings and expenses. For example, the Indian government was borrowing money to cover the current spending deficit in the 1980s since its current spending was higher than its current revenue.
2. To Finance War: The government may take out a loan to protect the nation. The cost of modern warfare is exceedingly high. Taxes alone cannot be used to fund it. Furthermore, public loans are a simpler way to raise money than taxes. Therefore, in order to cover the high costs associated with war, the government may turn to massive public borrowing. In actuality, the First and Second World Wars were mostly to blame for the massive rise in public debt in many developed nations during the 20th century.
3. Financing Development Plans: It is anticipated that the government of the less developed nations would be crucial in fostering economic growth. For this, it might implement development strategies. The government must spend a lot of money on a number of development initiatives. The low taxable capacity of the populace in these nations prevents the government from imposing high taxes. Public loans are the sole option in these situations. For example, in order to finance its five-year plans, the Indian government had to take out large loans.
4. To Provide Foreign Exchange: In the early phases of economic development, underdeveloped nations require foreign exchange to make large investments, buy capital equipment and raw supplies from overseas, and close the balance of payments deficit. Consequently, foreign loans are required to acquire resources from overseas. During the course of economic development, this causes the external debt to rise significantly.
5. To Check Recession: In order to prevent the threat of depression, governments in industrialized nations have been borrowing to control the recession. A decline in private investment and consumption spending causes a recession. The government may raise loans in such a scenario in order to boost public spending. By doing this, the economy would be protected from the negative effects of the Great Depression and aggregate demand would rise.
6. Meeting Unforeseen Expenses: The nation occasionally has to deal with unanticipated events like floods, famines, tsunamis, epidemics, etc. To address such economic crises, the government must spend a significant amount of money. As a result, the government issues loans to cover the significant expenses that result from it.
7. To Finance Public Enterprises: The public sector has been tasked with playing a significant role in fostering economic development in nations like India. Large sums of money are needed for the public sector's developmental initiatives, such as the growth of heavy and basic industries and the construction of social and economic infrastructure. Such monies cannot be provided by the government only through taxation. As a result, it issues loans to cover the public sector's financial needs.
8. Soft Revenue Option: Even while public spending has been rising rapidly globally, there is little chance that it will be financed by taxes. People’s taxable capacity is poor in developing nations. People all throughout the world are angry about a significant tax rise. Therefore, in order to avoid public criticism and resistance, the government frequently opts for the soft option of borrowing money to cover its growing expenses.