Page 77 - ES 2020-21_Volume-1-2 [28-01-21]

60 Economic Survey 2020-21 Volume 1

Government expenditure increased consistently during these years, which led to general
government debt reaching record levels. This fiscal push imparted the necessary impetus required

for the growth to take off and average 8 per cent in real terms over the next six years from 2003-
04 to 2008-09. High growth in this period brought debt down from the record high levels of 83
per cent of GDP attained in 2003-04 to around 70 per cent of GDP in 2009-10 (Figure 9a and
9b). This episode highlights that public debt – when productively streamlined – can enable the
economy to reach a higher growth trajectory and, in turn, ensure debt sustainability.

Figure 9a: Debt-to-GDP ratio increased to Figure 9b: Debt-to-GDP ratio declined due to higher
historically high levels during FY 1996- FY 2006 growth that resulted from FY 2003 to FY 2011:
due to greater spending: Strong positive correlation Negative correlation between additional real growth
between change in fiscal spending and 1 year ahead of india over and above the global real growth and 1
change in debt-to-GDP levels. year ahead change in debt-to-GDP levels.

Source: IMF, MoSPI, RBI

DiRECTiON OF CAuSALiTY iN OTHER ECONOMiES

2.15 Is India an outlier, where higher growth rates lead to lower public debt but not vice-versa?
The confusion about the direction of causality – from growth to debt sustainability or vice-
versa – possibly stems from the fact that the academic and policy literature focuses primarily
on advanced economies, where the direction of causality may be entangled by lower potential
growth when compared to a high-growth economy such as India.

2.16 On examining the trends in IRGD and change in debt-to-GDP ratio for low growth
economies like US and UK in Figure 10, no correlation is observed between the two variables.
This indicates lack of evidence for direction of causality from real growth rate to government
debt-to-GDP these countries.