The purpose of this paper is to examine the convergence analysis of public debt among Indian states using annual data from 1990‒1991 to 2014‒2015.
The paper tests this hypothesis using club convergence technique propounded by Phillips and Sul (2007).
The results reveal the existence of debt divergence for overall Indian states. States are formed into four clubs on the basis of their level of debt, and three clubs support the hypothesis of club convergence. Further, the total public debt decomposes into three compositions such as market loans, bank loans and loans and advances from the central government. The existence of convergence is found for market loans and bank loans; however, the presence of divergence is found in case of loans and advances for overall states.
Since public debt plays an important role for fiscal health of the Indian states, findings of this study suggest to squeeze the fiscal consolidation further for Indian states whose debts as a percentage to gross state domestic product are on the higher side. Further, the examination of debt convergence helps to manage debt level among the states because heavy dependence on public debt could retard investment and economic growth.
Whereas bulk of empirical studies emphasize on examining the linkage between public debt and economic growth, and issue on debt sustainability across Indian states, examination of convergence of debt and its compositions (markets borrowings, bank loans and loans and advances from the central government) among the Indian states is scanty.
The authors gratefully acknowledge the valuable suggestions received from two anonymous referees in the earlier draft of this paper. The earlier draft of this paper was presented at the 54th The Indian Econometric Society Conference, Jammu and Kashmir. The first author acknowledges the comments and suggestions of Professor N.R. Bhanumurthy and other participants. The usual disclaimer applies.
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