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How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach

Author

Listed:
  • Ranjan Kumar Mohanty

    (Ranjan Kumar Mohanty (corresponding author) is at the National Institute of Public Finance and Policy (NIPFP), New Delhi, India, e-mails: ranjanmohanty85@gmail.com; ranjan.mohanty@nipfp.org.in)

  • Sidheswar Panda

    (Sidheswar Panda is at the Indian Institute of Technology Indore, Madhya Pradesh, India, e-mail: sidheswareco@gmail.com)

Abstract

The study investigates the macroeconomic effects of public debt in India during 1980–2017 using a structural vector autoregression framework. The objective is to examine the impact of public debt on the interest rate, investment, inflation and economic growth in India. The results of the impulse response functions show that public debt has an adverse impact on economic growth but a positive impact on the long-term interest rate in the short run and a mixed effect (both negative and positive) on investment and inflation. We also find that domestic debt has a more adverse impact on the economy than external debt. The estimated variance decomposition analysis finds that much of the variation in selected macro variables are explained by public debt and growth in India. This study suggests that public debt especially domestic debt should be controlled and channelled productively to have a favourable impact on the economy. JEL Classification: H63, O40, C40

Suggested Citation

  • Ranjan Kumar Mohanty & Sidheswar Panda, 2020. "How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 14(3), pages 253-284, August.
    • Handle: RePEc:sae:mareco:v:14:y:2020:i:3:p:253-284
    DOI: 10.1177/0973801020920092
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    Public Debt; Internal Debt; External Debt; Economic Growth; Structural VAR Approach; India;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General

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