The Adjustment Towards National Solvency in Developing Countries: An Application to India

Subrata Ghatak and Paul Levine ()

No 647, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We use a small macro model of the Indian economy to examine the cost of the adjustment required to secure national solvency. This is compared with the corresponding cost if India were to repudiate its debts and experience financial autarky as a consequence. Our empirical results suggest that a small drop in the trend growth rate, resulting from a loss of foreign investment and lending to the domestic sector, is sufficient to deter reneging, but only if the government is sufficiently far-sighted and chooses a discount rate of 5% (or less) a year. If the Indian government were to discount at a rate of 10% per annum, the drop in trend growth of as much as 4% is insufficient to deter reneging. Debt relief generally improves the relative attractiveness of debt repayment. With a 10% discount rate, however, even writing off 75% of India's external debt fails to make debt repayment incentive-compatible.

Keywords: Debt; India; Solvency (search for similar items in EconPapers)
JEL-codes: F34 O53 (search for similar items in EconPapers)
Date: 1992-05
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=647 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: The adjustment towards national solvency in developing countries: An application to india (1994)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:647

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... pers/dp.php?dpno=647

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().