Page 78 - ES 2020-21_Volume-1-2 [28-01-21]

Does Growth Lead to Debt Sustainability? Yes, But Not Vice-Versa! 61

Figure 10: No correlation between iRGD and change in debt-to-GDP
ratio for uS and uK
10(a): US

10(b): UK

Source: IMF, World Bank
Notes: d: Change in General Government Debt as a per cent of GDP
r: Real interest rate; g: Real growth rate
Data on real interest for UK available upto 2014 with WB Data portal

2.17 Figure 11a shows the same time-series correlations as estimated for India above for the
advanced economies – Canada, France, Germany, Greece, Italy, Spain, Japan, US and UK.
These correlations are estimated by pooling the data for these countries over the last four
decades. We notice that the correlation between real GDP growth rates and one-year-ahead
change in general government debt-to-GDP levels is significantly negative. Similarly, the
correlation between change in general government debt-to-GDP levels and one-year-ahead
growth rates is also negative and statistically significant. Thus, unlike in the case of India, the
time-series correlations do not suggest the direction of causality as both sets of correlations
are statistically significant. This difference is extremely important to highlight because the
implications for fiscal policy – especially during the current crisis – are starkly different for
India when compared to policies that mimic those followed by advanced economies.