Consider the following statements regarding the "Burden of Debt": 1. Government debt held by its own citizens is considered more burdensome than external debt. 2. External debt involves a transfer of resources abroad for interest payments. 3. Future generations are burdened if government borrowing reduces capital formation and growth. Which of the statements given above is/are correct?

Correct Option The correct option is 2 and 3 only. Explanation The "Burden of Debt" refers to the impact of public debt on the economy and the welfare of citizens. Economists distinguish between internal debt (owed to citizens within the country) and external debt (owed to foreign lenders). The burden is analyzed based on resource transfer and the impact on capital formation. Statement-wise Analysis - Statement 1 is Incorrect: Internal debt is generally considered less burdensome than external debt. When the government repays internal debt, money is transferred from taxpayers to bondholders within the same economy. While this may cause income redistribution, it does not reduce the aggregate resources available to the nation. In contrast, external debt repayment involves a leakage of national resources. - Statement 2 is Correct: External debt creates a direct burden on the economy because servicing this debt (interest and principal repayment) requires the transfer of real goods, services, or financial resources to foreign countries. This results in a net reduction of the national income available for domestic consumption and investment. - Statement 3 is Correct: The burden of debt on future generations depends on how the borrowed funds are utilized. If government borrowing is used for consumption expenditure rather than investment, or if it leads to "crowding out" (reducing private investment), the future capital stock of the economy will be smaller. Consequently, future generations will inherit the obligation to repay the debt without a corresponding increase in productive capacity or income. Key Takeaway External debt imposes a greater burden than internal debt due to the outflow of national resources. Future generations bear a burden if current borrowing reduces capital formation, leaving them with debt obligations but lower productive capacity.

NCERT Class 12 Economics — Chapter 7: Government Budget and the Economy

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Consider the following statements regarding the "Burden of Debt":

Government debt held by its own citizens is considered more burdensome than external debt.
External debt involves a transfer of resources abroad for interest payments.
Future generations are burdened if government borrowing reduces capital formation and growth.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B1, 2 and 3
C2 only
D2 and 3 only

Did you get this right?

Solution

Correct Option

The correct option is 2 and 3 only.

Explanation

The "Burden of Debt" refers to the impact of public debt on the economy and the welfare of citizens. Economists distinguish between internal debt (owed to citizens within the country) and external debt (owed to foreign lenders). The burden is analyzed based on resource transfer and the impact on capital formation.

Statement-wise Analysis

Statement 1 is Incorrect: Internal debt is generally considered less burdensome than external debt. When the government repays internal debt, money is transferred from taxpayers to bondholders within the same economy. While this may cause income redistribution, it does not reduce the aggregate resources available to the nation. In contrast, external debt repayment involves a leakage of national resources.
Statement 2 is Correct: External debt creates a direct burden on the economy because servicing this debt (interest and principal repayment) requires the transfer of real goods, services, or financial resources to foreign countries. This results in a net reduction of the national income available for domestic consumption and investment.
Statement 3 is Correct: The burden of debt on future generations depends on how the borrowed funds are utilized. If government borrowing is used for consumption expenditure rather than investment, or if it leads to "crowding out" (reducing private investment), the future capital stock of the economy will be smaller. Consequently, future generations will inherit the obligation to repay the debt without a corresponding increase in productive capacity or income.

Key Takeaway

External debt imposes a greater burden than internal debt due to the outflow of national resources. Future generations bear a burden if current borrowing reduces capital formation, leaving them with debt obligations but lower productive capacity.

Your note

More from Chapter 7: Government Budget and the Economy

Consider the following statements regarding the "Annual Financial Statement" in India: 1. It is a statutory requirement under the Fiscal Responsibility and Budget Management Act, not the Constitution. 2. It includes estimates for the coming financial year. 3. It distinguishes between the revenue account and the capital account. Which of the statements given above is/are correct?

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With reference to the "Allocation Function" of the government budget, consider the following statements: 1. It addresses the provision of public goods that cannot be provided effectively by the market mechanism. 2. Public goods are characterized by being rivalrous in consumption and excludable in nature. 3. The "free-rider" problem is easily solved by charging a user fee for public goods. Which of the statements given above is/are correct?

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Consider the following statements regarding "Public Provision" and "Public Production": 1. Public provision implies that goods are financed through the budget and used without direct payment. 2. Goods provided by the government must necessarily be produced directly by the government. 3. Public goods may be produced by the private sector. Which of the statements given above is/are correct?

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Consider the following statements regarding "Capital Receipts": 1. Recovery of loans is considered a revenue receipt. 2. Capital receipts either create a liability or reduce the financial assets of the government. 3. Market borrowings are considered non-debt creating capital receipts. Which of the statements given above is/are correct?

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Consider the following statements regarding "Revenue Expenditure": 1. It includes expenditure that does not result in the creation of assets. 2. Interest payments on debt are classified as capital expenditure. 3. Grants given to state governments are treated as revenue expenditure even if they are meant for the creation of assets. Which of the statements given above is/are correct?

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Correct Option

The correct option is 2 and 3 only.

Explanation

Statement-wise Analysis

Statement 1 is Incorrect: Internal debt is generally considered less burdensome than external debt. When the government repays internal debt, money is transferred from taxpayers to bondholders within the same economy. While this may cause income redistribution, it does not reduce the aggregate resources available to the nation. In contrast, external debt repayment involves a leakage of national resources.
Statement 2 is Correct: External debt creates a direct burden on the economy because servicing this debt (interest and principal repayment) requires the transfer of real goods, services, or financial resources to foreign countries. This results in a net reduction of the national income available for domestic consumption and investment.
Statement 3 is Correct: The burden of debt on future generations depends on how the borrowed funds are utilized. If government borrowing is used for consumption expenditure rather than investment, or if it leads to "crowding out" (reducing private investment), the future capital stock of the economy will be smaller. Consequently, future generations will inherit the obligation to repay the debt without a corresponding increase in productive capacity or income.