Abstract
This article utilizes the Bohn framework for panel data and penalized spline technique for testing public debt sustainability in 20 major Indian states during 2007-08 to 2018-19. The study shows that the primary surplus reacts positively to public debt only in 4states, indicating debt sustainability in these states. Interestingly, the reaction coefficients are time-varying in 10 states, of which three are sustainable. Further, we descriptively verified whether the sustainable debt is welfare-enhancing as well during the study period. We found that debt is neither sustainable no welfare-enhancing in the case of 12 states, so they need to take corrective actions.
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