Debt decomposition and the role of inflation: A security level analysis for India

Abstract

To study India's debt dynamics, we assemble a novel data-set on Indian public debt with consistently defined aggregate annual components from 1951 to 2018, and Centre-State security level data from 2000 to 2018. Based on aggregate debt data, we quantify the contribution of inflation, real GDP growth, nominal interest rates and primary deficit/surplus towards India's debt-dynamics. We find that inflation is an important component in financing India's government debt historically. From the security level data, using the Hall-Sargent methodology, we find that nominal returns on the marketable and non-marketable portions of the Centre's debt account for the highest contribution towards changes in public debt. Our paper helps inform the debate on the adoption of flexible inflation targeting in India.