How Does Public Debt Affect the Indian Macroeconomy? A Structural VAR Approach

This study investigates the macroeconomic effects of public debt in India using a Structural Vector Auto regression (SVAR) framework for the period from 1980 to 2017. The objective of this study is to examine the impact of several types of public debt on economic growth, investment, interest rate and inflation in India. The results of the Impulse response functions show that public debt has an adverse impact on economic growth, a positive impact on long-term interest rate and a mixed response (both negative and positive) on investment and inflation in India. It is also found that the domestic debt has a more adverse impact on the economy than external debt in India. The estimated variance decomposition analysis shows that much of the variations among selected macro variables are explained by public debt and growth in India. The study suggests that public debt, especially the domestic debt should be controlled and used in a more productive manner in order to have a favourable impact on the economy.