GST and Debt Sustainability: The Indian Experience


  • Renjith Gulati Institute of Finance and Taxation (GIFT), Kerala



In the context of a perceptible rise in the share of sub-national debt in India’s total public debt, and the predominant role of GST as a revenue source for the state, this study attempts to analyse the sustainability of debt policies adopted by sub-national governments in the context of GST. It looks at the 20 major Indian states, using the fiscal policy response function, two alternative specifications, and panel data methodology to analyse the issue at aggregate and disaggregate levels during GST regime. The results indicate that the debt policy is sustainable at the aggregate level, but only in 9 states at the disaggregate level during the GST regime. However, when GST compensation is excluded from the model, the test results do not indicate that Indian states pursued sustainable debt policies. The observed results are then amplified and corroborated using an indicator-based approach, and it is concluded that the GST remains an undermining factor of debt sustainability. Overall, the study draws attention to the states’ poor revenue performance after GST, and the challenges to the sustainability of their debt position. Policy intervention should be sought to improve the debt situation through an effective GST mechanism in states where the debt is unsustainable.


Public debt, primary balance, GST, debt sustainability, fiscal reaction function, Indian states, panel data


Download data is not yet available.

Author Bio

Renjith, Gulati Institute of Finance and Taxation (GIFT), Kerala

P.S. Renjith is an Assistant Professor, Gulati Institute of Finance and Taxation (GIFT), Kerala


Abiad, Mr Abdul, and Mr Jonathan David Ostry. Primary surpluses and sustainable debt levels in emerging market countries. International Monetary Fund, 2005.

Afonso, Antonio. "Fiscal sustainability: The unpleasant European case." FinanzArchiv/Public Finance Analysis (2005): 19-44.

Azizi, Karim, Nicolas Canry, Jean-Bernard Chatelain, and Bruno Tinel. "Are no-ponzi game and transversality conditions relevant for public debt? a keynesian appraisal." Political Economy Research Institute, Working Paper 296 (2012).

Bailey, Robert W. The Crisis Regime: The MAC, the EFCB, and the Political Impact of the New York City Financial Crisis. SUNY Press, 1984.

Barro, Robert J. "On the determination of the public debt." Journal of political Economy 87, no. 5, Part 1 (1979): 940-971.

Bertola, Guiseppe, and Allan Drazen. "Trigger points and budget cuts: Explaining the effects of fiscal austerity." The American Economic Review 83, no. 1 (1993): 11.

Bhatt, Antra, and Pasquale Scaramozzino. "Federal transfers and fiscal discipline in India: An empirical evaluation." Public Finance Review 43, no. 1 (2015): 53-81.

Bi, Huixin, and Nora Traum. "Estimating sovereign default risk." American Economic Review 102, no. 3 (2012): 161-66.

Bohn, Henning. "The sustainability of budget deficits in a stochastic economy." Journal of Money, Credit and Banking 27, no. 1 (1995): 257-271.

Bohn, Henning. "The behavior of US public debt and deficits." the Quarterly Journal of economics 113, no. 3 (1998): 949-963.

Bohn, Henning. "Are stationarity and cointegration restrictions really necessary for the intertemporal budget constraint?." Journal of monetary Economics 54, no. 7 (2007): 1837-1847.

Buiter, Willem H., and Urjit R. Patel. "Debt, deficits, and inflation: an application to the public finances of India." Journal of public Economics 47, no. 2 (1992): 171-205.

Claeys, Peter, Raúl Ramos, and Jordi Suriñach. "Fiscal sustainability across government tiers." International Economics and Economic Policy 5, no. 1 (2008): 139-163.

D'Erasmo, Pablo, Enrique G. Mendoza, and Jhing Zhang. "What is a sustainable public debt?, Harald Uhlig and John Taylor (eds), Handbook of Macroeconomics." (2015).

Dafflon, Bernard, ed. Local public finance in Europe: balancing the budget and controlling debt. Edward Elgar Publishing, 2002.

Fincke, Bettina, and Alfred Greiner. "Debt sustainability in Germany: empirical evidence for federal states." International Journal of Sustainable Economy 3, no. 2 (2011): 235-254.

Freire, Mila, and John E. Petersen, eds. Subnational capital markets in developing countries: from theory to practice. World Bank Publications, 2004.

Fukasaku, Kiichiro, and Luiz De Mello. "Fiscal decentralization and macroeconomic stability: The experience of large developing and transition economies." Democracy, decentralization and deficits in Latin America. Paris: OECD (1998).

Garg, Sandhya, Ashima Goyal, and Rupayan Pal. "Why tax effort falls short of tax capacity in Indian states: A stochastic frontier approach." Public Finance Review 45, no. 2 (2017): 232-259.

Gerson, Philip, and David Nellor. "Philippine Fiscal Policy: Sustainability." Macroeconomic issues facing ASEAN countries (1997): 91.

Ghosh, Atish R., Jun I. Kim, Enrique G. Mendoza, Jonathan D. Ostry, and Mahvash S. Qureshi. "Fiscal fatigue, fiscal space and debt sustainability in advanced economies." The Economic Journal 123, no. 566 (2013): F4-F30.

Greiner, Alfred, and Bettina Fincke. Public debt, sustainability and economic growth. Springer International Pu, 2016.

Greiner, Alfred, and Göran Kauermann. "Debt policy in euro area countries: Evidence for Germany and Italy using penalized spline smoothing." Economic Modelling 25, no. 6 (2008): 1144-1154.

Haber, Gottfried, and Reinhard Neck. "Sustainability of Austrian public debt: a political economy perspective." Empirica 33, no. 2 (2006): 141-154.

Ianchovichina, Elena, Lili Liu, and Mohan Nagarajan. Subnational Fiscal Sustainability Analysis: What Can We Learn from Tamil Nadu?. Vol. 3947. World Bank Publications, 2006.

Dash, Santosh Kumar, and Kiran Kumar Kakarlapudi. "Kerala's GST revenue performance in a comparative perspective." Kerala Economy 2 (2021): 33-39.

Liu, Lili, and Michael Waibel. "Sub-national Borrowing, Insolvency and Regulation.‖ in Macro Federalism and Local Finance, ed. by Anwar Shah." World Bank, Washington, DC (2008).

Mahdavi, Saeid. "Bohn's test of fiscal sustainability of the American state governments." Southern Economic Journal 80, no. 4 (2014): 1028-1054.

McCarten, William J. "The challenge of fiscal discipline in the Indian states." Fiscal decentralization and the challenge of hard budget constraints (2003): 249-286.

Mendoza, Enrique G., and Jonathan D. Ostry. "International evidence on fiscal solvency: Is fiscal policy “responsible”?." Journal of Monetary Economics 55, no. 6 (2008): 1081-1093.

Mikesell, John L. "Fiscal administration in local government: An overview." Washington DC, World Bank (2007): 15-51.

Mukherjee, Sacchidananda. "Goods and Services Tax efficiency across Indian States: panel stochastic frontier analysis." Indian Economic Review 55, no. 2 (2020): 225-251.

Nguyen, Truong. "Estimating India’s fiscal reaction function." Australia South Asia Research Centre 2013-05 (2013).

Pandey, Ritvik. "Cash and Debt Management in States." In Public Debt Management, pp. 41-55. Springer, New Delhi, 2016.

Potrafke, Niklas, and Markus Reischmann. "Fiscal transfers and fiscal sustainability." Journal of Money, Credit and Banking 47, no. 5 (2015): 975-1005.

Rao, Govinda M. "Evolv9ing Issues and Future Directions on GST Reform in India." Paper Submitted to Madras School of Economics (2022).

Rao, M. Govinda. Goods and Services Tax in India: Progress, Performance and Prospects. No. 2019-02. Columbia University Working Paper, 2019.

Rao, M. Govinda. "Changing contours in federal fiscal arrangements in India." Readings in public finance (2005): 440-441.

Renjith, P. S., and K. R. Shanmugam. "Sustainable debt policies of Indian state governments." Margin: The Journal of Applied Economic Research 12, no. 2 (2018): 224-243.

Renjith, P. S., and K. R. Shanmugam. "Dynamics of public debt sustainability in major Indian states." Journal of the Asia Pacific Economy 25, no. 3 (2020): 501-518.

Reserve Bank of India. “State Finances: A study of budgets -2020- 21” (2013).

Srivastava, Peeyush. "Debt Management of the Government." In Public Debt Management, pp. 23-39. Springer, New Delhi, 2016.

Ter-Minassian, Teresa. "Promoting responsible and sustainable fiscal decentralization." In Handbook of multilevel finance, pp. 437-458. Edward Elgar Publishing, 2015.

Uryszek, Tomasz. "Primary Deficit Indicator, Tax Gap, and Fiscal Sustainability-Evidence from Central and Eastern EU Member States." Finanse 9, no. 1 (2016).