Empirical Analysis on Sustainability of Public Debt in Indian States

K.R. Shanmugam and P.S. Renjith (renjith@gift.res.in)
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P.S. Renjith: Assistant Professor, Gulati Institute of Finance and Taxation, India

Working Papers from Madras School of Economics,Chennai,India

Abstract: This article utilizes the Bohn framework for panel data and penalized spline technique for testing public debt sustainability in 20 major Indian states during 2007-08 to 2018-19. The study shows that the primary surplus reacts positively to public debt only in 4 states, indicating debt sustainability in these states. Interestingly, the reaction coefficients are time-varying in 10 states, of which three are sustainable. Further, we descriptively verified whether the sustainable debt is welfare-enhancing as well during the study period. We found that debt is neither sustainable nor welfare-enhancing in the case of 12 states, so they need to take corrective actions.

Keywords: Sustainable Debt; Indian States; Bohn Model; Penalized Spline (search for similar items in EconPapers)
JEL-codes: E62 H63 H72 H74 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2022-12
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