Assessing the Long-Run Sustainability of Public Debt and Fiscal Deficit in India

Abstract

This article assesses the long-run sustainability of public debt and fiscal deficit in India for the period 1980–1981 to 2019–2020. The study estimated a model-based fiscal reaction function (FRF) using the Autoregressive Distributed Lag (ARDL) model to assess debt sustainability. The results revealed that the primary surplus responds positively and significantly to the previous period debt in both the short- and long-run. This implies that the fiscal policy satisfies the intertemporal budget constraint (IBC) and follows the debt-stabilizing rule. Next, to assess the sustainability of the fiscal deficit, we examined the long-run association between total revenues and total expenditures using a structural break cointegration test. The results revealed that they are cointegrated, implying that IBC is met and the fiscal deficit is sustainable. The results of long-run estimation provide evidence in support of strong budgetary sustainability. Overall, the results indicate that the public debt and the fiscal deficit are sustainable in India. From a policy standpoint, our research suggests that the government should take the necessary measures to reduce the growing public debt to ensure its long-run sustainability.