Whenever national loans are increased, they can lead to economic instability
in the country. In fact there is nothing good or bad with the debts; It all
depends upon the wisdom of the administration. If the government takes loans for
purposes of economic development and constructs dams, railways, canals,
factories, roads, etc., then the productive capacity of the nation goes up and
it leads to economic stability.
If debts are raised for consumption expenditure
and the productive capacity of the nation is not increased, then they lead to
economic instability in the country. In order, to examine the economic effects
of public debt, we will have to examine the following matter:
(i) The Amount of Loan. If the economy is functioning at the level of full
employment, even a small amount of loan will create inflationary pressure in the
economy. How much the price inflation will take place depends upon the amount of
borrowing. The greater the borrowing, the heavier is the degree of inflation and
(ii) Purpose of Loan. If the
country is in the grip of depression and the loan is raised for productive
purposes, it will increase income, output and employment in the economy. As the
aggregate demand is increased with public debt, therefore, it has a healthy
effect on the economy. If public loans are raised for fighting a war, it
cripples the productive capacity of the nation and becomes a deadweight debt.
These, therefore, result in the instability of the economy.
(iii) Internal Loan and External
Loan. Public debt whether it is internal or external constitutes a burden on
the commodity. The nature of burden of external debt, however, differs from the
internal, debts. In case of external debt, the loan along with the rate of
interest is to be paid to the creditor country. This means we deprive the
citizens of our own country with the goods and services produced at home.
If the external loan is used for
economic development, It will have a healthy effect on the economy, In case, it is used for consumption purposes or for waging a war,
then they are burden on the community. It in fact is mortgaging of future.
The internal loans are raised from the central bank, commercial banks, and
the people living in the country. If the internal debt is utilized for
consumption expenditure, it will lead to inflationary pressure in the economy.
If it is used for productive purposes (if excess capacity is not achieved), it
will help in raising the level of income and employment and thus will lead to
(iv) Rate of Interest. if a huge amount of public loan is incurred at a. higher
rate of interest, it will take away a sizable portion of the national income for
its repayment. The economic stability of the country will, thus, be adversely