Abstract
In the eve of inconclusive controversy over the “cause-effect” relationship between public debt and economic growth, this paper tries to examine this dynamic relationship empirically for the Indian economy over the period of 1980–1981 to 2015–2016. This paper applies the time-series techniques like unit root test, VAR lag selection criteria, Johansen cointegration test, VECM, VEC granger causality test, impulse response function, and variance decomposition function. The application of Johansen test on first order integrated series shows the presence of long-run cointegration among variables like domestic debt, external debt, and economic growth. The VECM model found the statistically significant and negative coefficient of error correction term in external debt equation expressing the restoration of the long-run equilibrium at the rate of 6.83% every year between growth, domestic debt, and external debt. The infliction of the VEC Granger causality test noticed that there is no feedback relationship among the variables in short run, but there exists the unidirectional causality from economic growth and domestic debt to external debt in long run. The result of impulse response function and variance decomposition function also confirms the long-run causality from growth and domestic debt to external debt. Therefore, these empirical results suggest that reliance on debt for development purposes is not a safe option, even though the presence of no feedback relationship among the said variables in short runs. So, Indian economy should ensure higher growth rate while accumulating public debt and should extend its efforts to increase the revenue to finance the development expenditure.
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- 1.
The FRBM act brought the formalization in the fiscal discipline through the mechanism of slashing down the deficit in fiscal indicators like revenue deficit, fiscal deficit and primary deficit and, thereby, maintaining the sustainability and transparency in fiscal discipline.
- 2.
Classical economists like J.B. Say, Adam Smith, Ricardo, Malthus, J.S. Mill, Bastable, Paul Leroy–Beaulieu, etc.
- 3.
Debt overhang is the condition of an organization (for example, a business, government, or family) that has existing debt so great that it cannot easily borrow more money, even when that new borrowing is actually a good investment that would more than pay for itself. Simply, it asserts that if there is a possibility that countries’ future debt will be more than its repayment abilities.
- 4.
The crowding out effect is an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending. Again, if govt will go for higher ED and if the greater share of public debt (foreign capital) is used to treat the debt obligations, then very little would remain available to finance investment and growth; this cannel is also known as the “crowding out effect” of ED.
- 5.
GDP at the current price at market price is used as a proxy for economic growth. Because all other variables such as TPD, DD, ED are expressed in current price.
- 6.
The vibrant concept ‘public debt’ plays a pivotal role in the traditional as well as modern or contemporary public finance. Literarily, public debt demonstrates the loans or liabilities raised by the government with a corresponding commitment to the repayment within a stipulated time period. Total Public Debt (TPD) is the combination of Domestic Debt (DD) and External Debt (ED).
- 7.
Domestic Debt (DD), otherwise termed as National Debt, refers to the loans or borrowings raised by the public authorities within the legal jurisdiction of the economy. DD is not only composed of internal debt but also of small savings, provident funds & other accounts and reserve funds & deposits. The main internal sources from which the government can amass funds are individuals, non-banking financial institutions, commercial banks and central banks of the concerned economy.
- 8.
A debt is said to be external debt (ED) if/when a loan is floated outside the country. Its main sources are foreign financial institutions, foreign governments, and foreign multinationals and international organization such as IMF, IBRD, and ADB etc.
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Manik, N., Khan, N.A. (2018). Public Debt and Economic Growth in India: Evidence from Granger Causality Test. In: Khan, N. (eds) Challenges and Issues in Indian Fiscal Federalism. India Studies in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-10-6217-9_10
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