Page 80 - ES 2020-21_Volume-1-2 [28-01-21]

Does Growth Lead to Debt Sustainability? Yes, But Not Vice-Versa! 63

2.19 The evidence that the magnitude of GDP growth affects the direction of causality from
growth to debt sustainability is buttressed by the evidence of this causal relationship for the all
high growth EMEs put together, which include India, China, Indonesia, Malaysia, Thailand,
Philippines, Vietnam and Turkey. Figure 12 shows that higher growth leads to lower debt-to-
GDP ratios over the period 1980 to 2018 but not vice versa. This may be inferred from the
statistically significant negative correlation observed between real growth rate and 1-year ahead
change in general government debt-to-GDP, and statistically insignificant correlation between
change in debt-to-GDP and one year ahead real growth rate.

Figure 12: Direction of causality: Growth to Debt in high growth EMEs

Data on General Government that has been used. Countries include India, China, Indonesia, Malaysia, Thailand,
Philippines, Vietnam, Turkey
Based on availability of General Government debt data on IMF Debt database. The panel is unbalanced.

2.20 Thus, the evidence clearly points out that for countries growing their GDP at high rates,
growth leads to lowering of their public debt as measured by their debt-to-GDP ratios but not
vice versa. In contrast, when the GDP growth rate is low, no such causal relationship manifests
between growth and public debt. This is seen through the following summary of the results
demonstrated so far.

• For India and other EMEs, which have consistently grown their GDP at high rates over the
last few decades, the relationship between debt and growth exhibits a clear direction of
causality: Higher growth lowers debt-to-GDP ratios but lower debt does not necessarily
lead to higher growth.

• The same phenomenon is obtained during the high growth phases for the advanced
economies, which have otherwise grown at significantly lower GDP growth rates when
compared to India and other EMEs.

• In contrast, across both the high and low growth episodes, in the advanced economies,
where GDP growth rates have been low on average over the last few decades, this
relationship does not manifest.

• A Granger causality test of this relationship for panel of advanced countries and EMEs
including India, shows that while real GDP growth rate causes general government
debt-to-GDP in EMEs, this relationship is not clearly seen in the advanced countries
(see Box 6).