Public debt sustainability in sub-national level: a case of Karnataka.

Abstract

This paper attempts to empirically measure the public debt sustainability of Karnataka State in India for the period starting from 1991 to 2018. Three well-established methods are adopted to measure public debt sustainability, namely, indicator approach, time series approach and sensitivity analysis. The indicator approach shows that Karnataka's public debt satisfies Domer (1944) debt sustainability condition. Both the unit root test and fiscal policy response function under the time series approach revealed that public debt is sustainable and the response function is positive and significant in the post-fiscal reform period. Forward-looking sensitivity analysis has indicated public debt sustainability even after including growth rate and interest rate risks. Fiscal distress caused by the COVID-19 pandemic and corrective measures taken by Karnataka state is also discussed in the paper.