Differentiate between internal and external public debt. Explain their relative advantages and risks for a developing country like India.

Internal Debt Characteristics

Rupee-denominated and raised domestically through instruments like the Floating Rate Savings Bond, 20201 (Taxable), internal debt is managed primarily by the Reserve Bank of India. It is less exposed to exchange rate fluctuations but can contribute to inflation and liquidity risks.

Internal Debt Benefits

Internal borrowing supports large-scale infrastructure and welfare initiatives, exemplified by the Ujwal DISCOM Assurance Yojana (UDAY) in Andhra Pradesh432, mobilizing domestic savings without immediate foreign exchange constraints. It also reduces vulnerability to external shocks and deepens domestic financial markets through schemes like RBI Retail Direct, which encourages retail investor participation.

External Debt Benefits

External debt provides access to cheaper capital with longer repayment periods, crucial for capital-intensive projects. It bolsters foreign exchange reserves, which currently cover 68.9 percent of external debt, enhancing external sector stability. Additionally, loans from multilateral agencies facilitate technology transfer and policy support, aiding developmental reforms in Andhra Pradesh.

Internal Debt Risks

High internal borrowing can crowd out private investment by absorbing domestic savings, leading to higher interest rates and restricted credit availability, which may hamper job creation and economic growth in states like Andhra Pradesh.