The Impact of Debt Overhang on Economic Growth: A Study of India and its Neighbouring Countries

Around the world, particularly in developing economies, debt has become a crucial factor influencing economic stability and growth. As global debt levels reach unprecedented highs, understanding its impact on economic performance has never been more essential. This study aims to analyze how debt accumulation has influenced economic stability and growth in India and its neighbouring economies. This study explores key macroeconomic indicators, debt structures, and fiscal sustainability to assess whether excessive debt overhang hinders economic progress. The study utilizes a fixed-effects regression model on a panel dataset comprising India's neigbouring countries—namely China, Bangladesh, Pakistan, Sri Lanka, Nepal, Bhutan, and Afghanistan—spanning the years 2008 and 2022. Key predictor variables include debt overhang, revenue adequacy, exchange rates, and reserves adequacy, while GDP growth serves as the response variable. The results indicate that both debt overhang and exchange rate volatility have a significantly negative effect on GDP growth. Conversely, revenue adequacy and reserve levels showed no meaningful influence on economic performance. These outcomes emphasize the importance of sound debt governance and maintaining exchange rate stability to support economic stability and resilience. This study underscores the necessity for policymakers to implement sustainable debt strategies and prudent fiscal policies. Strengthening economic fundamentals and ensuring responsible borrowing practices are crucial for mitigating risks associated with excessive debt burdens in the region.