The Impact of Domestic Debt on Economic Growth of a Country

Srishti Shankar Yadav ()
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Srishti Shankar Yadav: PGDM Student, Indus Business Academy

A chapter in Proceedings of the IBA IEA Conference on Economics and Public Policy (Ecofluence 2024), 2025, pp 7-34 from Springer

Abstract: Abstract Domestic debt is a key determinant of public finance as it provides governments with opportunities to finance deficits, cover capital expenditure projects such as infrastructure, and cushion economic stability. This paper analyses the effect of domestic debt on economic growth, inflation, and financial stability, with emphasis on India. Applying a thorough examination of macroeconomic statistics over the past 30 years (1995–2024), the study utilizes statistical and econometric methods, such as co-integration tests, Granger causality tests, and regression modelling, to measure the impact of internal debt on GDP growth. The results show that domestic debt has no statistically significant direct impact on economic growth but leads to financial instability when poorly managed. The research points to issues like deficits, interest payments, and crowding out of private sector investment. From these findings, the paper suggests a strong debt management strategies, enhanced fiscal responsibility, and measures to balance inflation management and interest rate stability. Through these interventions, policymakers can make the most of domestic debt use while reducing economic risks.

Keywords: Domestic Debt; Internal Debt; Fiscal Deficit; Economic Growth; Financial Stability; Inflation; Interest Rates; Crowding-Out Effect; Public Finance; Debt Management; Monetary Policy; Government Borrowing; GDP Growth; Private Sector Investment; Debt Sustainability (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-766-3_2

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DOI: 10.2991/978-94-6463-766-3_2

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