Impact of public debt on economic growth: a case study of Jammu and Kashmir

Mohd Yousuf Malik () and M. K. Agarwal ()
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Mohd Yousuf Malik: University of Lucknow
M. K. Agarwal: University of Lucknow

SN Business & Economics, 2023, vol. 3, issue 7, 1-20

Abstract: Abstract Jammu and Kashmir is an ex-special category state that has traditionally stressed fiscal health, relying on central transfers and debt. The rising debt burden on India's subnational economy has become a burning issue and target of fiscal policy after the Covid-19. Thus, the current research attempts to evaluate the influence of debt on economic development and to assess the sustainability of the state's expanding public debt from 1991 to 2021.Two major research questions have been posed in the article, the first being estimating the sustainability of the total outstanding liabilities of Jammu and Kashmir, which will be followed by modeling the relationship between total liabilities, interest receipts, gross capital formation and economic growth. To estimate the long-run relationship between total liabilities and economic growth of Jammu and Kashmir ARDL (Autoregressive Distributive Lag) model has been used based on the stationarity of the data, where some variables were integrated of order 1 and some variables were integrated at the level. The Domar’s debt sustainability model has been estimated to understand the economic sustainability of debts. Empirical analysis indicates that Jammu and Kashmir has much higher Debt to GSDP ratio than national average. Debt serving or interest payment to Revenue Receipts ratio has declined constantly over the period of time from 24% in 1992 to merely 5% in 2020, which marks a drastic improved performance. The study finds that both public debt and debt-servicing burden have a negative and significant impact on per-capita income in both short-run and long-run. The Domar’s debt sustainability analysis indicates that the state has unsustainable debts in early 2000s however after the implementation of FRBM act the sustainability was restored. The bifurcation of the state in two union territories and Covid-19 pandemic has resulted in unattainability of debt in Jammu and Kashmir from 2018 to 2021.

Keywords: Public debt; Economic growth; Special category states; FRBM; Domars debt sustainability (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s43546-023-00505-5

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