Sustainability and Threshold Value of Public Debt of Centre and All State Governments in India

Abstract

This study examines the sustainability and the threshold level of public debt of the Centre and all State Governments in India, using the latest data from 1990-91 to 2020-21, and using statistical methods and threshold regression method. The results suggest that the current levels of public debt of both the Centre and all States are unsustainable, and the debt sustainability threshold is about 40% for the Centre and 22% for all States. There is a greater need for the Centre and all States to control their debt levels as they are currently growth reducing. The simulation exercises based on the debt dynamics suggest that the Indian economy (nominal GDP) should grow at 12%, and the fiscal deficit target should be 2% each for the Centre and all States from 2023-24 onwards, for the Centre to attain the debt sustainability target before 2027-28 and all States to do so in 2030-31. The relevant policy strategy for all governments is revenue augmentation and containing public expenditures, including unproductive subsidies.