Role of Public Debt in Indian States in the Post-Reform Era

Abstract

The substantial amount of existing literature investigating the debt–growth association for high-income countries shows that debt has a negative impact on economic growth or the existence of an inverted U-shaped relationship between these two variables on some occasions. Given the lack of literature involving developing economies in this space, our study entirely focuses on a developing country like India. The study examines the empirical relationship between public debt (internal) and state gross domestic product (SGDP) for India in the post-reform era. The panel data extend from the year 2000 till 2020. Our random error component model findings indicate a positive and significant impact of debt in enhancing the Indian SGDPs for the above-mentioned period. Results are also confirmed by using an alternative estimation technique, namely, fixed effect. Next, we address the issue of endogeneity by employing generalized method of moments. Our results continue to remain robust. Finally, the inclusion of other control variables does not alter our findings. JEL Codes: H63, H54, O50, C51