Dynamics of external debt and capital flight in India

Abstract

Countries at early stages of development have small stocks of capital and are likely to have investment opportunities with rates of return higher than those in advanced economies. The external debt for productive investment within reasonable levels enhances economic growth, but beyond certain levels additional indebtedness reduces growth. The mounting burden of debt servicing and debt crisis motivates capital flight, a paradoxical situation in which resources are flowing out of developing countries. This paper investigates the relationship between external debt and capital flight via TSLS (Two Staged Least Square Method). The results indicate positive relationship between external debt and capital Flight in India.