GST and Debt Sustainability: The Indian Experience

Abstract

In the context of a perceptible rise in the share of sub-national debt in India’s total public debt, and the predominant role of GST as a revenue source for the state, this study attempts to analyse the sustainability of debt policies adopted by sub-national governments in the context of GST. It looks at the 20 major Indian states, using the fiscal policy response function, two alternative specifications, and panel data methodology to analyse the issue at aggregate and disaggregate levels during GST regime. The results indicate that the debt policy is sustainable at the aggregate level, but only in 9 states at the disaggregate level during the GST regime. However, when GST compensation is excluded from the model, the test results do not indicate that Indian states pursued sustainable debt policies. The observed results are then amplified and corroborated using an indicator-based approach, and it is concluded that the GST remains an undermining factor of debt sustainability. Overall, the study draws attention to the states’ poor revenue performance after GST, and the challenges to the sustainability of their debt position. Policy intervention should be sought to improve the debt situation through an effective GST mechanism in states where the debt is unsustainable.