Sustainability and Growth Implications of Sub-national Debt: The Indian Experience

P. S. Renjith () and K. R. Shanmugam ()
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P. S. Renjith: Gulati Institute of Finance and Taxation
K. R. Shanmugam: Madras School of Economics

Journal of Quantitative Economics, 2025, vol. 23, issue 3, No 8, 875-898

Abstract: Abstract This study critically examines the debt policies of 22 Indian state governments, focusing on the sustainability of debt and its implications for economic growth. To assess debt sustainability, it employs a combination of the panel version of the fiscal policy response function and penalized spline estimation for the period 2005–06 to 2019–20. To analyze the growth implications of public debt, an augmented growth model for panel data and a penalized spline technique is used. The study observes that a positive and statistically significant response of the primary balance to changes in outstanding debt is sufficient for ensuring debt sustainability. Only in 6 out of 22 states, the primary surplus reacts positively to public debt, indicating debt sustainability. Moreover, the reaction coefficients are time-varying in 8 states. In 16 states, the debt is unsustainable, which suggests policy intervention. The study also finds that public debt has a growth-stimulating effect in 8 states. In 14 states, the debt has either no significant or a significantly negative effect on growth, indicating the need for corrective measures. This highlights that sub-national debt sustainability does not necessarily lead to economic growth. Overall, this is a unique analysis in the Indian sub-national context. Its findings can help policymakers, international agencies and other researchers in formulating strategies to improve the debt conditions of Indian states.

Keywords: Sub-national debt; Indian states; Sustainability; Economic growth (search for similar items in EconPapers)
JEL-codes: E62 H63 H7 O23 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s40953-025-00445-x

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