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Debt sustainability: Empirical evidence from Indian states

Author: P.S. RENJITH AND K. R. SHANMUGAM
Published in PFM, Vol. 18 No. 2

This study utilizes the Bohn framework for panel data and a penalized spline tech-nique for testing the sustainability of public debt in 20 major Indian states for the pe-riod 2003-04 to 2014-15. It is found that in 14 out of 20 states, the primary surplus reacts positively to public debt, indicating debt sustainability in these states. Moreo-ver, it is interesting to note that the reaction coefficients are not constant but varies with time in all the states. In six states, the debt is unsustainable which suggests for policy intervention in them. Our analysis also indicates that the net borrowings in these six states exceed their FRBM limits, and which are partially used for non-investment purposes. Therefore, they need to strictly adhere to debt-deficit targets. It is our hope that these results will be useful to policymakers and other stakeholders in such a way that their strategies will improve the debt position of these states and make them sustainable.

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