The Forum of Free Enterprise is a non-political organization founded in 1956 by A. D. Shroff, and has been established to educate public opinion in India on free enterprise and a democratic way of life. The Forum publishes booklets to further its objects. The following booklet titled “Is India Heading Towards an Internal Debt Trap?” was published on September 14, 1988, and is authored by Dr. S. R. K. Rao. The present booklet is an excerpt taken from the author’s lecture at the Ninth Public Sector Banks’ Economists’ Meet in May 1986. The paper is divided into five sections. First section provides a brief background to and definition of the term ‘ Internal Debt Trap’, coined by the author Dr. S. R. K. Rao. In the second section the author draws upon various reports published by the Central government’s planning commissions, economic surveys, finance commission, RBI and CAG reports to make a compelling case for the existence of growing internal debt problem in India. Third section provides quantitative and qualitative data to show the pattern of India’s growing domestic debt and proceeds to suggest policy alternatives available to the government to counter internal debt traps in the fourth section. The paper concludes by warning about the eminent threat posed to the government’s ability to control or affect market fiscal conditions through debt financing.