Public debt policy of the government plays an important role in public finance.

Public debt refers to borrowings of the government Raising debt loan is the most common activity of a government because in a welfare state, government expenditure generally exceeds government revenue.

Public debt is classified into two types:

(1) Internal debt : It refers to borrowings of  the government to raise fund within the economy. In case of internal debt, domestic currency is used. It is less complex to manage internal debt. E.g. borrowings from RBI, nationalized banks and business organisations within a country.

(2) External debt : It refers to borrowings of the government to raise fund outside the economy. In case of external debt, foreign currency is used. It is more complex to manage external debt. E.g. borrowings from foreign government and international organisation like IMF, World Bank, etc. Government requires fund for investing in production as well as for making provision of infrastructure facilities.

Thus, public debt is more popular source of revenue for the government in the modern times.