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Sustainability and Threshold Value of Public Debt in Tamil Nadu
The sustainability and the threshold level of public debt in Tamil Nadu is examined using the modern time series methods and threshold regression method. The results suggest that the current level of debt in the state is unsustainable, and the debt sustainability threshold is about 18.5%, which is slightly lower than the 20% norm set by the Fiscal Responsibility and Budget Management review committee for states. The state should control its debt as it is currently not growth-inducing. The simulation exercise based on the debt dynamics of the state suggests that the state economy should grow at 14% and fiscal deficit target should be 2% from 2023–24 onwards to attain the debt sustainability target in 2035–36 and with 16% growth the state could reach the target in 2030–31. The relevant policy strategy for the state is to increase its own revenue–GSDP ratio by 0.75% and contain its revenue expenditures by 0.75% from 2023–24.
The authors greatly acknowledge the referee for useful comments.
Public debt sustainability and fiscal discipline are important for the economic stability of any national or subnational government. When its revenues fall short of its expenditure commitments, the government borrows to finance its excess expenditures. The net borrowing of the government is reflected in the fiscal deficit. Public debt is the total liabilities or borrowings of the government. Many economists believe that borrowings can enable the government to finance important development programmes and projects (Hakura 2020).
If the debt amounts can be used to finance the social/infrastructure development projects, these projects can trigger economic growth and lead to higher income in future, which may offset the cost of debt servicing. Therefore, the debt is not an issue for a government if it generates enough surplus resources in future to service its debt.1 Public debt is considered sustainable if the government is able to meet all its current and future obligations without external financial assistance or going into default. In a lucid sense, it is basically about good housekeeping (Blanchard et al 1991).
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