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Do Macroeconomics Channels Matter for Examining Relationship Between Public Debt and Economic Growth in India?

Debi Prasad Bal and Badri Narayan Rath ()
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Debi Prasad Bal: National Institute of Technology Sikkim
Badri Narayan Rath: Indian Institute of Technology Hyderabad

Journal of Quantitative Economics, 2018, vol. 16, issue 1, 121-142

Abstract: Abstract This paper investigates the impact of public debt on economic growth using key macroeconomic channels for the period 1970–2013 in the context of India. The analysis is undertaken in two different steps: first, it is examined whether public debt has any nonlinear impact on economic growth and second, determines the key channels through which public debt affects economic growth. The results derived from 2SLS model show that public debt positively affects economic growth in the short run, while it shows a negative impact in the long run. Further, by using Nonlinear ARDL approach, this paper supports the existence of a nonlinear impact of public debt on economic growth. The channels through which public debt significantly affects economic growth are households saving, public investment and total factor productivity growth. From policy perspective, we suggest that government should target the public investment and productivity channels for utilizing the public debt in India, and the government should opt for borrowings as long as it leads to capital formation of the country.

Keywords: Public debt; Threshold level; Economic Growth; Non-linear relation; 2SLS model (search for similar items in EconPapers)
JEL-codes: C63 H68 O23 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:spr:jqecon:v:16:y:2018:i:1:d:10.1007_s40953-017-0094-3