The relationship between the Debt-to-GDP ratio and the GDP in developed (US, Japan), developing countries (of Asia and Europe) and African sub-saharan countries with emphasis on Indian scenario: A comparative study

Abstract

There is no simple relationship between debt and growth […]. There are many factors that matter for a country’s growth and debt performance. Moreover, there is no single threshold for debt ratios that can delineate the “bad” from the “good”. (International Monetary Fund, 2012, p. 9)Gross Domestic Product (GDP) is often used as an indicator of the size of the economy and the debt-to-GDP ratio works as an indicator of the financial leverage for an economy. A low ratio points that an economy’s goods and services production is adequate to pay off its debts without letting further debts be incurred. The borrowing pattern of a nation and the election to opt to incur further debt depends on economic and geopolitical considerations which include recession, war, interest rates etc. On the other hand, a high ratio would imply that the economy is not producing sufficiently to pay off its debts. Just like any bank would be interested in providing a bigger amount of loan only when an individual makes more money; likewise, in an economy’s scenario, investors would be more interested in taking on a country’s debt if it could produce more. And if at any time investors happen to worry about the repayment, and then they start to ask for higher interest rate returns to secure themselves against the risk of default. This way, it increases the cost of debt and the economy might fall into the trap of debt crisis.This paper investigates the impact of India's public debt on its economic growth through an econometric analysis using data from the Reserve Bank of India, the International Monetary Funds, and the World Development Indicators for the period 1989-2014. The data is regressed in basic time series analysis taking into account the different variables that influence economic growth. The regression results show an inverted U-shape relationship between the public debt to GDP and its square. The results illustrate the theoretical findings of Reinhart and Rogoff's (2010) changing relationship between real GDP growth and government debt based on a debt threshold.