The definition of public debt varies depending on its purpose. A commonly used narrow definition of public debt covers the budgetary central government. The broadest definition of public sector debt combines general government with public nonfinancial corporations and public financial corporations, including the central bank.

It also covers publicly guaranteed debt (debt the public sector does not hold but has an obligation to cover) and external public debt (debt held by nonresidents of the country).

Debt sustainability is the ability of a country, to meet its current & future debt servicing obligations, without recourse to debt rescheduling or accumulation of arrears & without compromising growth. Assessments of debt sustainability carried out by the IMF and World Bank , covers both domestic and external public sector debt.

Public debt is one way to raise money for development. Other ways to raise the funds are , raising revenues, improving the efficiency of spending, avoiding leakages & improving the business environment. But these may take time to materialize and may not be enough. New borrowing should be consistent with fiscal spending and deficit plans. Debt that finances productive social and infrastructure spending can lead to higher income.

Comprehensive medium-term debt management strategies like debt reporting & debt statistics should be deployed by the government. A country’s debt-carrying capacity depends on several factors—among them the quality of institutions and debt management capacity, policies, and macroeconomic fundamentals.

Analysts look at whether policies needed to stabilize debt are feasible & consistent with maintaining growth potential or development progress. When countries borrow from financial markets, risks associated with refinancing are important too. To properly assess a country’s debt sustainability, it is important to cover all types of debt that pose a risk to a country’s public finances.

The Debt Sustainability Framework (DSF) is the main tool for multilateral institutions and other creditors to assess risks to debt sustainability in Lower-Income Countries (LICs). Debt is considered sustainable if debt-GDP ratio is stable or on a declining path. This is a necessary condition for solvency of any government’s finances. While debt ratios for the Central government are projected to decline under plausible assumptions, the behaviour of the States is strikingly different.

The debt ratio in some states increases because the primary deficit (total deficit excluding the interest payments), is much higher for the States compared to the Centre. A significant part of the Central government’s deficit is mainly towards interest payments on existing borrowings.