IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Debt-deficit dynamics in India and macroeconomic effects: A structural approach

  • Kannan, R
  • Singh, Bhupal

The structural approach adopted in this paper aims to trace out the evolution of public debt and deficits over a medium term horizon and its dynamic interaction with other key macroeconomic variables such as interest rate, inflation, trade gap and output. The policy simulations for India reveal that persistence of high level of fiscal deficits and debt may have adverse impact on interest rate, output, inflation and trade balance in the medium to long run. The passive evolution of fiscal deficits leads to an unstable regime over the medium to long term as debt-GDP ratio rises asymptotically. The findings of the paper imply that fiscal adjustment with compositional shifts in expenditure to achieve convergence not only leads to acceleration in the investment rate in the economy, it also facilitates monetary management by moderating inflation expectations and contributing to stable interest rate regime. The adjusted converging debt path is consistent with the higher growth trajectory. Such corrections also do not pose the challenge of growth inflation trade-off.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16480.

in new window

Date of creation: 2007
Date of revision: 2007
Handle: RePEc:pra:mprapa:16480
Contact details of provider: Postal:
LudwigstraƟe 33, D-80539 Munich, Germany

Phone: +49-(0)89-2180-2459
Fax: +49-(0)89-2180-992459
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Paul Cashin & Nilss Olekalns & Ratna Sahay, 1998. "Tax Smoothing in a Financially Repressed Economy; Evidence from India," IMF Working Papers 98/122, International Monetary Fund.
  2. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  3. Missale, Alessandro, 1997. " Managing the Public Debt: The Optimal Taxation Approach," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 235-65, September.
  4. Aschauer, David Alan, 1989. "Does public capital crowd out private capital?," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 171-188, September.
  5. Moorthy, Vivek & Singh, Bhupal & Dhal, Sarat Chandra, 2000. "Bond financing and debt stability: theoretical issues and empirical analysis for India," MPRA Paper 12148, University Library of Munich, Germany.
  6. 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.
  7. Buiter Willem H. & Urjit R. Patel, 2006. "Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules," India Policy Forum, National Council of Applied Economic Research, vol. 2(1), pages 1-54.
  8. repec:pal:imfstp:v:27:y:1980:i:4:p:814-855 is not listed on IDEAS
  9. Barro, Robert J., 1974. "Are Government Bonds Net Wealth?," Scholarly Articles 3451399, Harvard University Department of Economics.
  10. repec:pal:imfstp:v:44:y:1997:i:2:p:210-248 is not listed on IDEAS
  11. Goyal, Rajan & Khundrakpam, J. K. & Ray, Partha, 2004. "Is India's public finance unsustainable? Or, are the claims exaggerated?," Journal of Policy Modeling, Elsevier, vol. 26(3), pages 401-420, April.
  12. James D. Hamilton & Marjorie A. Flavin, 1985. "On the Limitations of Government Borrowing: A Framework for Empirical Testing," NBER Working Papers 1632, National Bureau of Economic Research, Inc.
  13. Cashin, P. & Olekalns, N., 2000. "An Examination of the Sustainability of Indian Fiscal Policy," Department of Economics - Working Papers Series 748, The University of Melbourne.
  14. Quintos, Carmela E, 1995. "Sustainability of the Deficit Process with Structural Shifts," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 409-17, October.
  15. Pradhan, B. K. & Ratha, D. K. & Sarma, Atul, 1990. "Complementarity between public and private investment in India," Journal of Development Economics, Elsevier, vol. 33(1), pages 101-116, July.
  16. Easterly, William & Schmidt-Hebbel, Klaus, 1993. "Fiscal Deficits and Macroeconomic Performance in Developing Countries," World Bank Research Observer, World Bank Group, vol. 8(2), pages 211-37, July.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:16480. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.