The process of planned development, in terms of the Five Year Plans, started in India in 1951. The main objective of the Five Year Plans was to attain a high growth with equitable income distribution. The emphasis in the plans was laid on high government investment for development purposes. In the drive for higher investment, in view of the unavailability of financial resources from tax revenues due to the low economic base, and inadequate surpluses from public sector enterprises, the government resorted to borrowed funds – domestic as well as external. The increasing reliance on external borrowing had important economic and political implications. Therefore, since the early 70s, after the war between India and Pakistan in 1971 and the oil shock in 1973, the dependence on external borrowing declined and the government increasingly resorted to domestic borrowing. In periods of financial strain, increasing reliance was placed on borrowing from RBI, resulting in monetisation of debt. The domestic debt situation became critical by the mid 80s, mainly because government was able to garner resources, at low rates of interest, from RBI and markets, and fiscal profligacy was rampant.

The objective of this study was to look at the trends and investigate the implications of domestic debt on Indian economy. The period of the empirical work has been restricted to the earlier exhaustive work done in 1997. The descriptive analysis broadly pertains to the period 1951–2017 where data was available while the empirical analysis varies from 1951–95 to 1971–95, depending on the availability of consistent time series data.

In India, the central and the state governments incur domestic debt. Therefore, the appropriate measure is the consolidated debt position of the central and the state governments to analyse the implications of domestic debt on the macro-economic aggregates in the economy. Domestic debt of the government, in addition to market loans and bonds, also includes Treasury bills, small saving schemes, provident funds, and reserve funds and deposits. The component, reserve funds and deposits, refer to domestic debt which includes depreciation, developmental, contingency or similar funds, which are not strictly liabilities but more of financial obligations in the regular course of the conduct of government business. Therefore, this component has been excluded while empirically analysing the impact of domestic debt on the macro aggregates.