An Empirical Analysis of Effect of Public Debt on Economic Growth in India in the Post-Reform Era

Abstract

The present paper examines the causal nexus between public debt and economic growth for 15 NSC states of India for the period 1991-2015 using Dumitrescu Hurlin causality test. The panel causality test identified the endogeneity issue as it revealed the bidirectional causality between these two variables. Further, we revisited the effect of public debt on economic growth for NSC states for the same period by incorporating other controlled variables in the model. Understanding the potential endogeneity issue, we employed FMOLS which solves the endogeneity as well as serial autocorrelation problem in the model. The results of the present study revealed that public debt, total revenue receipts and total credit have favorable effect on economic growth. As regards policy implications, the government should adopt proper tax reform strategies to minimize tax leakages. Further, it should implement effective credit and risk management practices to improve the asset quality. Lastly, suitable debt management strategy should be adopted to utilize debt in the most effective and proficient way to expand productivity capacity of the economy. This, in turn, will sustain high economic growth in India.