Structural breaks and unit roots: a further test of the sustainability of the Indian fiscal deficit

Abstract

If public expenditure and public revenue are I(0) public debt is sustainable but if these are I(1) and not cointegrated or have a cointegrating vector different from [1, -1] the public debt is said to be unsustainable. Extant work indicates that India’s public debt is unsustainable. We re-investigate this issue by allowing for endogenous structural breaks for two data sets - the British period 1871-1921 and the post independence period 1950-1997. Revenue and expenditure series (nominal as well as real) are trend stationary with structural breaks, at least for the post independence period. Thus Indian public debt is not unsustainable.