Burden of Public Debt, Growth and Poverty: A State Level Investigation in the Indian Context

Abstract

This paper examines the effect of debt liability of the government on economic growth and poverty alleviation in the major states of India. The proposition is that if the burden of public debt is high, the amount of debt servicing will be also high. In that case sufficient funds can not be allocated for economic growth and welfare measures for the poor. The theoretical result of this study suggests that if a greater share of the available fund is used for debt servicing, the growth rate declines. The empirical results of panel regression based on state level data in the Indian context show that a higher ratio of gross fiscal deficit to state GDP reduces per capita income and increases poverty. The other factors like gross capital formation, capital expenditure of the government are effective in reducing poverty through their positive impact on per capita income. On the other hand, if poverty is high in a state, revenue collection will be low and, in that case, public debt will rise. A kind of reverse causality may be there between debt burden and poverty. This problem has been partially addressed in this study.