Debt Sustainability of States in India: An Assessment

Balbir Kaur, Atri Mukherjee, Anand Prakash Ekka 
(Department of Economic and Policy Research, Reserve Bank of India)

Abstract: The debt position of the state governments in India, which deteriorated sharply between 1997-1998 and 2003-2004, has witnessed significant improvement since 2004-2005. Debt sustainability analysis based on empirical estimation of inter-temporal budget constraint and fiscal policy response function in a panel data framework, covering 20 Indian states for the period 1980-1981 to 2015-2016, indicates that the debt position at the state level is sustainable in the long run. The increase in contingent liabilities of states and take-over of large chunk of these liabilities through debt restructuring of State Power Distribution Companies, however, would adversely affect the debt position of states.

Key words: gross fiscal deficit; public debt; state governments

JEL codes: H62, H63, H70