Public Debt in India: A Security Level Analysis

We assemble a novel data-set on Indian public debt that contains consistently defined aggregate annual components from 1951-2018, and Centre-State security level data from 2000-2018. Using a standard debt-decomposition framework, we quantify the extent to which inflation, real GDP growth, nominal interest rates and the primary deficit/surplus explain Indian debt-dynamics. We show that inflation's contribution to lowering public debt has been substantial over time. We also undertake a Hall-Sargent(1997, 2011) style debt-decomposition using all outstanding Centre and State securities from 2000-2018. We show that nominal returns on the marketable and non-marketable portions of the Centre's debt account for the highest contribution in explaining the change in public debt. We show that while the adoption of flexible inflation targeting has diminished the role of inflation in debt liquidation, the large contribution of nominal returns pose a challenge to debt management.