Consider the following : I. Market borrowing II. Treasury bills III. Special securities issued to RBI Which of these is/are component(s) of internal debt ?

1. Introduction to Public Debt and Liabilities (basic)

To understand government debt management, we must first distinguish between the government's Total Liabilities and what is technically called Public Debt. Think of Total Liabilities as the 'grand total' of everything the government owes. This includes Public Debt, Public Account Liabilities (like National Small Savings Funds or Provident Funds), and Extra-Budgetary Resources. As of late 2022, Public Debt alone accounted for roughly 90% of the Government of India's total debt Vivek Singh, Government Budgeting, p.162. Public Debt is further classified based on where the money is coming from:

• Internal Debt: This is debt owed to lenders within the country. It includes Marketable Debt like Government Dated Securities (G-Secs) and Treasury Bills (T-Bills) which are traded in the market, and Non-marketable Debt like special securities issued to the RBI or International Financial Institutions.
• External Debt: This refers to money owed to foreign creditors, including multilateral agencies (World Bank, ADB), bilateral lenders (foreign governments), and commercial borrowings Nitin Singhania, Balance of Payments, p.485.

The legal foundation for this is found in the Constitution of India. There is a vital distinction between the Union and the States regarding their borrowing powers:

Feature	Union Government (Article 292)	State Government (Article 293)
Borrowing Scope	Can borrow both internally (within India) and externally (abroad).	Can borrow only internally; they cannot raise loans directly from abroad.
Security	Secured against the Consolidated Fund of India.	Secured against the Consolidated Fund of the State.

M. Laxmikanth, Centre-State Relations, p.156 While States cannot borrow externally on their own, the Central Government often facilitates external financing for them from agencies like the World Bank by providing a sovereign guarantee Vivek Singh, Government Budgeting, p.161.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.161-163; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Balance of Payments, p.485; Indian Polity, M. Laxmikanth (7th ed.), Centre-State Relations, p.156

2. Understanding the Capital Account and Fiscal Deficit (basic)

To understand government debt, we must first look at how the government manages its money. Under Article 112 of the Indian Constitution, the Budget is divided into two parts: the Revenue Account and the Capital Account Vivek Singh, Government Budgeting, p.151. Think of the Revenue Account as the government's 'daily maintenance' account—money coming in from taxes and going out for salaries or interest. The Capital Account, however, deals with the government's assets and liabilities. A Capital Receipt is defined as any money the government receives that either creates a liability (like a loan that must be repaid) or reduces an asset (like selling shares in a Public Sector Undertaking) Vivek Singh, Government Budgeting, p.152.

When the government’s total expenditure exceeds its total receipts (excluding borrowings), we get the Fiscal Deficit. This is perhaps the most vital indicator of a government's financial health because it represents the total borrowing requirement of the government from all sources Nitin Singhania, Indian Tax Structure and Public Finance, p.110. To fill this gap, the government turns to various instruments of Internal Debt. These include Market Borrowings (issuing dated securities to the public), Treasury Bills (short-term debt), and sometimes special securities issued to the Reserve Bank of India Vivek Singh, Government Budgeting, p.152.

Historically, India relied heavily on 'deficit financing' (printing money or direct borrowing from the RBI), but since the 1990s, the focus has shifted toward fiscal consolidation. This led to the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, which aims to keep the fiscal deficit within manageable limits to ensure long-term economic stability Nitin Singhania, Indian Tax Structure and Public Finance, p.114.

Feature	Revenue Receipt	Capital Receipt
Nature	Non-redeemable (don't have to pay back)	Redeemable (Debt) or Asset-reducing
Impact	No change in assets/liabilities	Increases liability or decreases assets
Examples	Income Tax, GST, Dividends, Fees	Market Loans, T-Bills, Disinvestment

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.151-152; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.110, 114

3. Classification: Internal vs. External Debt (intermediate)

To understand government debt management, we must first look at where the money comes from. The primary classification of public debt is based on the residence of the creditor: Internal Debt and External Debt. Internal debt refers to the portion of government liabilities owed to lenders within the country. This is the dominant component of India's debt profile, accounting for roughly 90% of the total public debt Vivek Singh, Government Budgeting, p.162. It includes marketable securities like Treasury Bills (short-term) and Dated Securities (long-term), as well as non-marketable debt like special securities issued to the RBI.

External Debt, on the other hand, represents the total debt a country owes to foreign creditors. For the Government of India, this includes 'Sovereign Debt' such as loans from multilateral agencies (like the World Bank or ADB) and bilateral assistance from foreign governments Vivek Singh, Government Budgeting, p.163. Interestingly, even if the debt is denominated in Indian Rupees—such as Masala Bonds or FPI investments in government securities—it is often classified under external debt because the lender is located outside India Nitin Singhania, Balance of Payments, p.485.

A crucial distinction exists at the constitutional level. Under Article 292, the Union Government can borrow both internally and externally. However, under Article 293, State Governments are restricted to borrowing only from internal sources. If a state needs external financing, it must be facilitated through the Central Government, which provides a sovereign guarantee Vivek Singh, Government Budgeting, p.161.

Feature	Internal Debt	External Debt
Creditor	Residents (Banks, RBI, Insurance firms, Citizens)	Non-residents (Foreign Govts, World Bank, IMF, FPIs)
Instruments	T-Bills, G-Secs, Gold Bonds, Savings Bonds	Multilateral loans, Bilateral loans, ECBs
Currency	Almost exclusively Indian Rupee (INR)	Foreign Currencies (USD, Euro, Yen) or INR

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.161-163; Indian Economy, Nitin Singhania (2nd ed. 2021-22), Balance of Payments, p.485

4. Fiscal Policy Framework: FRBM Act (intermediate)

The Fiscal Responsibility and Budget Management (FRBM) Act, 2003 is the cornerstone of India’s fiscal discipline. Before this Act, the government often operated with high deficits, leading to a mounting debt burden. The primary philosophy behind the FRBM Act is inter-generational equity—the idea that the current generation should not over-borrow and leave a massive bill for future generations to pay. By limiting deficits, the Act aims to ensure long-term macroeconomic stability and remove fiscal obstacles that might interfere with the Reserve Bank of India’s monetary policy Indian Economy, Vivek Singh, Government Budgeting, p.156.

Initially, the 2003 Act set specific targets to reduce the Fiscal Deficit (FD) to 3% of GDP and the Revenue Deficit (RD) to 0%. However, global and domestic economic shocks (like the 2008 financial crisis) often led the government to pause or shift these deadlines. Over time, the focus shifted from purely looking at yearly deficits (the flow of borrowing) to the total debt stock (the accumulated debt). This transition was driven by the understanding that a high total debt-to-GDP ratio makes the economy vulnerable to interest rate shocks Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.82.

To modernize these rules, the FRBM Review Committee (NK Singh Committee) recommended a pivot in 2016-17. The committee suggested that the primary target should be the Debt-to-GDP ratio rather than just the fiscal deficit. It proposed a ceiling of 60% for the General Government (combined Central and State debt), broken down into 40% for the Central Government and 20% for the State Governments Indian Economy, Nitin Singhania, Indian Tax Structure and Public Finance, p.126. To achieve this, the government manages its internal debt, which consists of various instruments like market loans (dated securities), Treasury Bills (T-bills), and special securities issued to the RBI.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.156, 188; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Indian Tax Structure and Public Finance, p.115, 126; Macroeconomics (NCERT class XII 2025 ed.), Government Budget and the Economy, p.82

5. The Role of RBI in Debt Management (intermediate)

In the ecosystem of Indian finance, the Reserve Bank of India (RBI) wears many hats, but perhaps its most critical administrative role is acting as the Banker and Debt Manager to the Government. Just as a commercial bank manages your personal savings and loans, the RBI manages the Consolidated Fund, Contingency Fund, and Public Account for both the Central and State governments Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.68. When the government faces a temporary gap between its daily receipts (taxes) and its daily expenditure, the RBI provides a bridge loan facility known as Ways and Means Advances (WMA). These are not intended as long-term sources of finance but as a tool to smooth out cash flow mismatches Indian Economy, Nitin Singhania (ed 2nd 2021-22), Agriculture, p.260. Beyond temporary mismatches, the RBI orchestrates the government's Market Borrowing Program. To fund the fiscal deficit, the RBI issues marketable securities on behalf of the government, which include Treasury Bills (T-Bills) for short-term needs (less than a year) and Dated Securities for long-term borrowing. Additionally, the government may issue special securities directly to the RBI or other entities for specific purposes, such as bank recapitalization. All these instruments—T-bills, dated securities, and special securities—collectively constitute the internal debt of the government. Interestingly, the WMA system we use today replaced the old 'ad hoc Treasury Bills' system to ensure the government doesn't simply print money to fund its deficits, thereby maintaining a level of fiscal discipline Indian Economy, Nitin Singhania (ed 2nd 2021-22), Agriculture, p.260. To understand how the RBI balances these roles, look at the distinction between temporary liquidity and permanent debt:

Feature	Ways and Means Advances (WMA)	Marketable Securities (T-Bills/Dated Securities)
Purpose	To bridge temporary cash flow mismatches.	To finance the fiscal deficit (long-term funding).
Nature	Short-term credit/overdraft from RBI.	Debt instruments sold to the open market (banks, insurance, etc.).
Duration	Usually 10–14 consecutive working days Indian Economy, Nitin Singhania (ed 2nd 2021-22), Agriculture, p.260.	91 days to 40 years.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.68; Indian Economy, Nitin Singhania (ed 2nd 2021-22), Agriculture, p.260

6. Marketable vs. Non-Marketable Internal Debt (exam-level)

To understand government debt management, we must distinguish between the two primary ways the government borrows within the country: Marketable and Non-Marketable Internal Debt. Both are components of the Central Government’s internal debt, which is contracted against the Consolidated Fund of India Vivek Singh, Government Budgeting, p.162. The fundamental difference lies in their liquidity and tradability.

Marketable Internal Debt consists of government securities that can be bought and sold in the secondary market. These are the instruments you hear about most in financial news because their prices fluctuate based on interest rates. This category includes Treasury Bills (T-bills)—which are short-term instruments issued at a discount with maturities of 91, 182, or 364 days—and Dated Securities, which are long-term bonds with fixed or floating interest rates Vivek Singh, Money and Banking- Part I, p.46. Because they are traded on exchanges like the BSE/NSE and the RBI-managed NDS-OM platform, they provide the government with a flexible way to raise domestic market borrowings Vivek Singh, Money and Banking- Part I, p.47.

Non-Marketable Internal Debt, on the other hand, refers to securities that are not traded in the open market. These are typically issued to specific entities for specialized purposes and cannot be offloaded to other investors. A prime example is Special Securities issued to the RBI (often used for converting past debts) or securities issued to International Financial Institutions like the IMF and World Bank. While they are formal debt obligations of the Union Government, they do not participate in the "price discovery" of the open market. Other items like Savings Certificates and Small Savings (found in the Public Account) are also non-marketable, though they are technically classified as liabilities rather than internal debt in the strictest sense Vivek Singh, Government Budgeting, p.162.

Feature	Marketable Debt	Non-Marketable Debt
Secondary Market	Highly active; can be traded easily.	None; held by the original subscriber until maturity.
Examples	T-Bills, G-Secs (Dated Securities).	Special Securities to RBI, Recapitalization Bonds.
Price Discovery	Determined by market forces.	Fixed by the government/RBI.

Sources: Indian Economy, Vivek Singh (7th ed. 2023-24), Government Budgeting, p.162; Indian Economy, Vivek Singh (7th ed. 2023-24), Money and Banking- Part I, p.46-47

7. Solving the Original PYQ (exam-level)

Now that you have mastered the distinction between internal debt and external debt, this question tests your ability to categorize specific financial instruments under the government's domestic liabilities. Internal debt encompasses all obligations of the Central Government payable in Indian Rupees, sourced from within the country. As you learned in the module on Public Finance, these instruments are categorized into marketable and non-marketable debt, depending on whether they can be traded in the secondary market. By applying these definitions, you can see that any formal credit arrangement the government enters into with domestic entities—be it the public, banks, or the central bank—constitutes a component of this debt.

To arrive at the correct answer, we must evaluate each item as a sovereign commitment. Market borrowing (dated securities) and Treasury bills (T-bills) are the primary marketable tools the government uses to fund the fiscal deficit and manage short-term liquidity. While T-bills are for the short term, they are nonetheless a debt obligation. Crucially, Special securities issued to RBI (such as those for recapitalization or specific monetary purposes) also represent a formal debt of the government to the central bank. Since all three items are domestic liabilities, the correct answer is (D) I, II and III. This comprehensive classification is explicitly detailed in the Status Paper on Government Debt.

UPSC often sets traps by including items that students might mistake for "accounting entries" rather than actual debt. A common error is choosing (B) and excluding Special Securities, under the false impression that transactions with the RBI are separate from the national debt. However, in the context of the IMF Public Debt Management Guidelines, any instrument that creates a contractual repayment obligation to a domestic resident entity is part of the internal debt. Options (A), (B), and (C) are incorrect because they provide an incomplete picture of the government’s total domestic borrowing portfolio, which must account for both marketable and non-marketable securities.