Empirical Examination of Relationship amongst External Debt, Debt Servicing and Economic Growth in India: A Toda-Yamamoto Causality Approach

This study examines the relationship amongst external debt, debt servicing, and economic growth in India during the post-economic reform era. The Toda-Yamamoto causality test methodology is employed in this study to examine the relationships among the variables. Initially, the optimum lag length was selected based on LR, FPE, AIC, SIC and HQ. Then the unit root tests were performed using the Augmented Dickey Fuller (ADF) test, and the results indicated that the variables are I(1). Therefore, the Johansen cointegration test was performed and the trace statistics and maximum eigenvalues indicated no cointegration amongst the variables. These results aligned with the findings of the previous studies. Ultimately, the Block Exogeneity Wald test was performed to determine the existence and direction of causality among the variables. The results indicated that neither the external debt nor the debt servicing significantly causes change in nation’s GDP. However, economic growth significantly influences external borrowing and debt-servicing capacity, highlighting the critical role of sustained GDP growth in managing external debt sustainably. Hence, the study suggests that policymakers should focus on enhancing productivity, boosting exports, and strengthening institutional frameworks to ensure the productive use of borrowed resources.