Fiscal sustainability in India: evidence from Markov switching and threshold regression models
Studies in Economics and Finance
ISSN: 1086-7376
Article publication date: 4 July 2019
Issue publication date: 7 June 2021
Abstract
Purpose
The purpose of this study is to examine the fiscal sustainability issue by dividing the fiscal deficit into high and low regimes using the quarterly data from 1997: Q1 to 2013: Q3. Further, we obtain the optimum level of public debt at which fiscal sustainability can be achieved.
Design/methodology/approach
This study uses the Markov Switching-Vector Error Correction Model (MS-VECM) for examining fiscal sustainability and threshold regression model to obtain the optimum level of debt.
Findings
The results derived from MS-VECM reveal the evidence in favor of fiscal sustainability during low fiscal deficit periods. Similarly, using a threshold regression model, the optimum public debt as a percentage to GDP seems to be around 21 per cent on a quarterly basis, beyond this level, public debt hurts economic growth.
Practical implications
From the policy front, the government of India should cut down the fiscal deficit only if debt reaches beyond a threshold level.
Originality/value
Noting that the vast literature has focused on examining the fiscal sustainability in India, the novelty of this study is to examine the fiscal sustainability by considering high and low deficits regimes using a non-linear approach.
Keywords
Acknowledgements
The authors gratefully acknowledge the comments and suggestions received from the editor and four anonymous reviewers in the earlier draft of this paper. The usual disclaimer applies.
Citation
Akram, V. and Rath, B.N. (2021), "Fiscal sustainability in India: evidence from Markov switching and threshold regression models", Studies in Economics and Finance, Vol. 38 No. 2, pp. 227-245. https://doi.org/10.1108/SEF-09-2018-0281
Publisher
:Emerald Publishing Limited
Copyright © 2019, Emerald Publishing Limited