Examining sustainability of government debt in India: post Covid prospects

Srivastava, Dinesh Kumar and Bharadwaj, Muralikrishna and Kapur, Tarrung and Trehan, Ragini (2021): Examining sustainability of government debt in India: post Covid prospects.

Abstract

In this paper, we examine the determination of the sustainable level of debt-GDP ratio for the combined debt of central and state governments relative to GDP using (a) an analytical approach which was followed by the Twelfth Finance Commission (FC 12) and (b) an econometric model using threshold estimation. These methods provide results which are quite close to the target debt-GDP ratio of 60% determined by the Fiscal Responsibility and Budget Management (FRBM) review committee of 2018. In order to understand the evolution of government debt in India, we have divided the period from 1991-92 to 2018-19 into two sub-groups (A) consisting of years where a primary deficit was incurred; and (B) years where a primary surplus was shown. In the case of India, all years are characterized by primary deficit. These years are further divided into three sub-categories based on the contribution to the debt-GDP ratio made by (i) primary balance and (ii) excess of nominal growth rate over interest rate. The approach used here provides a modified view of the dynamics of debt as explained by the contribution of cumulated primary deficit and that of the excess of nominal growth over interest rate which was used in Rangarajan and Srivastava (2004). We have shown that this dynamics is well captured by an ARDL estimation which estimates the individual contribution of each of the contributing factor to debt accumulation namely primary deficit to GDP ratio, lagged debt-GDP ratio, nominal GDP growth rate and interest rate. We find that government debt in India is likely to exceed the sustainable debt-GDP threshold by a large margin in the post Covid years and even after normalcy is restored, it would take a long period for sustainability to be restored. It would also require that adequate policy measures are taken to ensure that growth rate exceeds the interest rate over long contiguous periods.

• Item Type: MPRA Paper
• Language: English
• Keywords: Covid-19, Government Debt, Growth, Inflation, debt
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; G - Financial Economics > G0 - General > G01 - Financial Crises; H - Public Economics > H1 - Structure and Scope of Government > H12 - Crisis Management; H - Public Economics > H6 - National Budget, Deficit, and Debt > H63 - Debt ; Debt Management ; Sovereign Debt; H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt

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