External and Domestic Debt: Which is More Beneficial for Long-term Economic Growth?

Abstract

From 1991 to 2022, the impact of public debt on India's economic growth is a multifaceted issue including a variety of social, political, and economic factors. Some argue that India's economy is suffering as a result of global economic concerns like recessions or depressions in other countries. As a result, the government must obtain loans to compensate the loss. The study attempted to explore the impact of public debt on India's economic growth between 1991 and 2022. It highlights two main perspectives on the debt crisis: global economic changes and domestic policy errors. Domestic debt has a coefficient of 0.056 and a p-value of 0.027, suggesting a positive and significant association with the dependent variable. External debt has a coefficient of 0.926 and a p-value of 0.0003, showing a strong and statistically significant positive association with the dependent variable. While borrowing is essential for capital-scarce economies like India to stimulate development, empirical research often shows a negative correlation between public debt and long-term growth. The study found that prudent debt management and using borrowed funds to diversify the economy can help generate resources to repay obligations without harming economic stability. Policymakers should use borrowed funds to diversify productive capacities, discourage excessive foreign borrowing, and balance fiscal stimulus with sustainable debt levels.