cDebt Policies of Indian State Governments Sustainability Fiscal Coordination and Growth Implications

Abstract

newline ABSTRACT newlineThe study analyses the debt policies of the Indian state governments through the vantage newlinepoints of sustainability, fiscal coordination and growth implications. More precisely, it newlineempirically (i) tests whether the debt policies of Indian state governments are sustainable or not newlineduring the period 2003-04 to 2014-15, (ii) investigates how the public debt policies of Indian newlinestates coordinate with the other fiscal (policy) indicators during the period and (iii) examines newlinehow the debt policy influences the growth process of Indian states newlineThe key motivation behind this attempt is that sub-national borrowing has become an newlineincreasingly important source of sub-national finance in many countries with the federal newlinesystem, including India. In the aftermath of growing tendency of decentralization, the newlinesub-national governments are made to heavily depend on the borrowed resources to meet their newlineexpenditure commitments. Accumulation of debt of such nature leads to the accumulation of newlinewhich is a persistent cause of many issues relating to (i) the reckless borrowing which is way newlineoff the repayment capacity of sub-national governments (ii) lack of coordination of debt with newlineother policy variables which has been implicated in many sub-national debt crises and (iii) the newlinenegative impact of the high levels of indebtedness on the growth process of many sub-national newlinegovernments. India provides an ideal federal setting to analyse the sub-national debt as newlineone-third of total government debt is owned by the state governments along with persistent newlinegrowth in the budget deficits and the borrowing requirements. newlineThis study primarily utilizes the Bohn framework for panel data and a penalized spline newlinetechnique for analyzing the above objective. The results indicate that the primary balance of newlinestate governments responds positively to high public debt and so debt policies are successful in newlinesustaining the debt situation of Indian states as a whole. However, at the individual level in 11 newlineout of 20 states debt is s