Q.Describe the various methods of redemption of public debt.

Redemption of public debt means its repayment by the government. The main methods are repudiation, refunding, conversion, budgetary surplus, sinking fund, terminable annuities, additional taxation, capital levy and using a favourable balance of payments for external debt.

Meaning

When the government spends more than its revenue, it borrows from the public, banks, institutions or foreign sources; this borrowing is called public debt. The process of repaying this debt and freeing the government from the burden of borrowing is called redemption of public debt. A sound redemption policy keeps public confidence and avoids an ever-growing debt burden.

Methods of Redemption

1. Repudiation of debt — the government simply refuses to pay the debt. This is not a genuine method of redemption; it destroys public confidence and is used only in extreme cases.
2. Refunding — old maturing bonds are repaid by issuing fresh bonds of the same value. The debt is not actually wiped out but is carried forward; the burden is merely postponed.
3. Conversion — old loans carrying a high rate of interest are converted into new loans carrying a lower rate when interest rates fall, reducing the interest burden.
4. Budgetary surplus — when the government has a surplus budget (revenue exceeds expenditure), the surplus is used to repay the debt. This is a sound but difficult method.
5. Sinking fund — the government creates a separate fund and sets aside a fixed amount from its revenue every year; this fund, with interest, is used to repay the debt at maturity. It is considered the best method.
6. Terminable annuities — the debt is repaid in equal annual instalments (annuities) over a fixed number of years, so that the debt is extinguished by the end of the period. …