Public Debt and Economic Growth Nexus: Evidence from South Asia

Abstract

It is well established in literature that the public debt and economic growth bear positive and non-linear relationship. However, in recent literature, evidence of no causal relationship is found when accounted for endogeneity in case of advanced economies (Panizza and Presbitero, 2014). Chudik, et al. (2017) analyse the data on forty countries and find no evidence of universally applicable threshold effect in the relationship between debt and growth. These advancements in the debt-growth literature provides the motivation to re-explore the relationship between public debt and economic growth under non-linearity and endogeneity in context of developing economies of South Asia including Pakistan, India, Bangladesh, and Sri-Lanka for the period 1980-2014. There exists a significant, positive but non-linear relationship between the public debt and economic growth for the selected set of developing countries when accounted for endogeneity and non-linearity. The negative association between the public debt and economic growth for the SAARC region is found when the debt level is higher than 61% of GDP, which is significantly lower than developed economies (90% of GDP). Individual threshold levels for debt-to-GDP ratio divulge that Sri Lanka, Pakistan, and India need to control their public borrowings as their current debt levels are higher and/or around the respective threshold levels.