Assessing India’s fiscal sustainability considering debt–deficit and financing dynamics

Shiv Shankar () and Pushpa Trivedi ()
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Shiv Shankar: Foreign Exchange Department, Reserve Bank of India
Pushpa Trivedi: Shiv Nadar University Chennai

Indian Economic Review, 2023, vol. 58, issue 1, No 2, 70 pages

Abstract: Abstract India’s fiscal consolidation did not follow the gliding path envisaged post-implementation of fiscal rules for central and state governments. Though the countercyclical fiscal measure is required to arrest the economic downturn, a protracted debt overhang may invite fiscal risk and impact growth adversely. Moreover, the stagnating growth and high deficit may pose further risks to debt sustainability. This paper examines the debt sustainability of India from 1981 to 2020 employing conventional fiscal reaction function (FRF) supplemented with a novel variant optimising the fiscal policies from the debt management perspective. The positive and significant estimated coefficient of debt to primary balance points for the sustainability of India’s debt. Moreover, the short-run sustainability in a time-varying expanding and contracting window reveals that there was some pressure on fiscal sustainability during 2001–03 and 2019–20, attributed to lower tax collection and economic slowdown, respectively. The optimal fiscal policy-induced FRF also points towards the sustainability of India’s debt, though the negative coefficient of bond flow emphasises the smoothening of bond supply to the domestic market whilst strategising domestic market borrowing.

Keywords: Primary balance; Fiscal reaction function; Optimal fiscal policy; Debt sustainability (search for similar items in EconPapers)
JEL-codes: C15 C22 E62 H63 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s41775-023-00179-8

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