Government Debt, Gross Investment and Economic Growth in Punjab State

Public borrowing is one of the major instruments of resource mobilization which direct the flow of resources into right channels, especially in case of developing economies. In case of India, the issue of states' debt has assumed a great attention since mid 90's due to the severe deterioration in the fiscal health of states. Increasing Fiscal imbalances and public debt pose risks to the prospects for stability and growth of the economy. In order to tackle these issues, it is imperative to analyze the kind of relationship that exists among these variables. The rationale behind this paper is to empirically analyze the relationship between economic growth and internal debt at Punjab state level. But an attempt has been made in the present study to examine the impact of public debt on economic growth. The study is based on regular time series data for a period of 22 years (i.e. from 1990-91 to 2011-12) in respect of Punjab economy. Grangers' causality analysis has been worked out to examine the cause and effect relationship between economic growth and public debt. Furthermore multiple linear regressions have been worked out to investigate the relationship between economic growth and public debt. Various studies have shown mixed impact of public debt on economic growth. There has been difference of opinions among researches for developing and developed economies. There are contrasting views on the positive and negative impact of public debt on economic growth, the present study has provided evidences for the positive relationship of public debt and economic growth. As per the findings of the study, a statistically significant and positive relationship between GSDP and outstanding liabilities has been observed.