Public Debt and Economic Growth in India: The New Evidence

Abstract

The study gives new evidence on the effects of public debt on economic growth in India with key macroeconomic indicators from 1980 to 2019. In the past decade, and after the COVID-19 pandemic, there is a substantial rise in public debt, which reached 90% of the GDP in April 2021. Therefore, it is imperative to study the impact of different public debt sources on the Indian economy to help policymakers frame informed debt management policies. The long-run equilibrium relationship and cointegrating coefficients are calculated using Johansen cointegration and fully modified ordinary least square techniques. Toda and Yamamoto’s (1995) Granger causality test is used as a short-run diagnostic test for the long-run equilibrium relationship. The study’s major findings suggest that domestic debt, total factor productivity (TFP) and exports are the major determinants of economic development in the long run. In contrast, economic prosperity determines the growth of external debt, debt service payments and TFP in the short run. It is recommended that the government should control and channel public debt productively for favourable growth effects.