An Empirical Investigation into the Relationship between India External Debt and Economic Growth

This empirical inquiry elucidates the relationship between external debt and GDP in India, evaluating debt’s role in the nation’s economic growth path given its historically contentious yet rising foreign capital reliance. In this study, the researcher examined the external debt and GDP data for India from 1991 to 2023 from RBI and IMF sources. First, statistical tests checked if the time series data had stable patterns over the years. Then, using R programming, we built a VAR model to analyse dynamic interactions between the variables. Further tests on this model evaluated the lead-lag and cause-effect relationship between external borrowing and India’s national income growth during the three decade-long economic reform era. The rigorous analysis provided empirical insights into the dynamics of external debt in India’s growth path since liberalisation. The analysis showed that external debt levels affect India’s GDP growth, but GDP itself does not influence external borrowing. Foreign capital inflows spur investment and expansion, evidenced by debt’s unidirectional impact on national income over the long term. However, excessive reliance can prove risky. The study can be applied to refine monetary and fiscal policies, and develop governance infrastructure and frameworks for external debt oversight and management. The data-backed revelations on debt’s impacts should help policymakers balance the risks and rewards of foreign capital reliance optimally.