Public debt and regional inequality in India: patterns, determinants, and implications.

Abstract

Economic recession and global health crisis have surged the public debt levels across nations to an unsustainable level. Debt can be productive provided nation-states utilize it for rapid growth and servicing the cost of loans. It can be unproductive if spent on wasteful expenditure. Thus, a relevant question is—does public debt hinder or promote growth? Reinhart and Rogoff’s (American Economic Review, 100: 573–578, 2010) empirical analysis observed a non-linear relation between debt and growth in developed countries. Kaur and Mukherjee’s (Reserve Bank of India, Occasional Papers, 33:1–37, 2014) analysis of the Indian economy determined a statistically significant non-linear relationship between debt and growth at state levels. Given this overview, this research examines the temporal and spatial patterns of state debt in India utilizing a statistical analysis. Geographical data are utilized to study state liability in India for 29 states and 2 union territories i.e. National Capital Territory of Delhi and Puducherry. The following three questions are addressed in this paper: (1) what is the relationship between public debt, regional inequality, and development? (2) what are the trends of public debt and regional inequality in India? (3) what are the determinants of outstanding center and state liabilities in India during 1980–81 and 2019–20? Descriptive statistics (dispersion, Gini coefficient, moving averages, and Theil entropy) reveal a declining inequality during each decade as well as considerable inter-state inequality for the period. A time series regression analysis suggests lending rate, GDP growth and trade balance are negatively related to total liability at the center and state levels; net FDI flows, GDP, trade balance, and foreign exchange reserves, are positively related. Prediction maps suggest both the lagging and developed states would incur high public debts, wherein the former would utilize debt for servicing interest cost and non-plan expenditure, and the latter will utilize debt for servicing interest cost and planned expenditure.