Long and Short-run Reconciliation Between External Debt and Economic Growth: An Empirical Evidence from India

Abstract

The economic prosperity of an economy depends upon several micro and macroeconomic variables. Every economy lacks some economic resources. Whenever the economy needs such resources, it can fill the gap by taking aid from external sources, in the form of external debt. However, it is still debatable whether external debt affects economic growth positively or negatively. Some studies find a positive relation between external debt and economic growth, whereas others find a negative one. The present study deals with this question in the case of the Indian economy. Based on external debt data from 1991 to 2021 and an autoregressive distributed lag (ARDL) cointegration model, this study has made an attempt to analyse the relationship between external debt and economic growth. The study has found that a long-run equilibrium relationship exists between them. External debt negatively affects economic growth in the short run but has an insignificant effect in the long run. In contrast, other variables like human skills and investment have a significant positive effect. Population growth harms economic growth. In the long run, the disequilibrium caused by some short-run fluctuations is adjusted by a 72% rate every year through an error correction mechanism.

JEL Classification: C32, F34, F35