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Revisiting Indicators of Public Debt Sustainability: Capital Expenditure, Growth and Public Debt in India

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  • Bhatt, Antra

Abstract

The paper tests whether productive expenditures share a long run re- lationship with debt to GDP ratio by using a multivariate time series framework. The theoretical model is based on dynamic optimization of utility and productive expenditure with respect to capital and debt. Literature on growth theory has suggested that all less productive expenditures can have a negative effect on the growth rate of real GDP per capita until the optimal level of productive expenditure is reached. This would indeed lead to higher level of debt as growth rate will be reduced. Aggregate yearly data for India covering the period 1980-2009 have been used. The CAPRATIO and Debt to GDP ratio are cointegrated. VAR modeling with error correction reveals that the model can be used for forecasts. The regression coecient between the two variables is negative, signifying the inverse relationship. Having proved the hypothesis of an inverse long run relationship between the two variables, a new indicator based on the Government Inter-temporal budget constraint is suggested, revolving around capital expenditure.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27422.

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Date of creation: 09 Dec 2010
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Handle: RePEc:pra:mprapa:27422

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Keywords: Public Debt sustainability indicators; Capital Expenditure; Growth.;

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  1. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
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  12. Raghbendra Jha & Anurag Sharma, 2001. "Structural Breaks and Unit Roots: A Further Test of the Sustainability of the Indian Fiscal Deficit," ASARC Working Papers 2001-08, The Australian National University, Australia South Asia Research Centre.
  13. Merih Uctum & Thom Thurston & Remzi Uctum, 2006. "Public Debt, the Unit Root Hypothesis and Structural Breaks: A Multi-Country Analysis," Economica, London School of Economics and Political Science, vol. 73(289), pages 129-156, 02.
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