An Empirical Analysis of Sustainability of Debt and Fiscal Deficit in India

The issue of sustainability of fiscal deficit has drawn considerable attention in recent times. Fiscal sustainability means application of set of fiscal policies that could be continued unaltered without jeopardising the macroeconomic objectives like economic growth, controlling inflation, balanced foreign exchange management, etc. Intertemporal budget constraint method is used to study how fiscal policy affects macroeconomic variables like price, output, foreign exchange reserve, primary deficit, sustainability of debt, etc. Most of the positive fiscal correction was found since the year 2003–04, when the Fiscal Responsibility and Budget Management act was passed by the government and the consequent efforts that it put to discipline the act, which were the principal reasons. The debt to Gross Domestic Product (GDP) ratio (bt) had been fluctuating during the previous years, but since 2000–01, it has been moving towards, which shows improving fiscal situation and transition towards a steady-state level of debt-GDP ratio. India has achieved sustainable levels of debt and deficits since year 2003–04; however, prior to this, the fiscal scenario was not favourable as it lacked sustainability.