Exploring the Relationship Between Public Debt and Environmental Performance in India: Does Moderating Role of Institutional Quality Matter?

ABSTRACT This study aims to investigate whether “institutional quality” is an indicator that moderates the interrelationship between public debt and environmental quality in India between 1996 and 2019. The present work uses traditional and modern unit root tests with multiple breaks and an “autoregressive distributed lag” bound test model for empirical examination. Long‐run and short‐run findings suggest that high public debt statistically and significantly damages environmental quality. Low institutional quality also significantly deteriorates the environment. The results of the moderating role of public debt and institutional quality suggest that they have an unfavorable impact on policies that harm the environment. This study has found evidence of an inverted U‐shaped EKC for India. Furthermore, findings from the ARDL model are confirmed using Fully‐Modified Ordinary Least Squares, Dynamic Ordinary Least Squares, and Canonical Cointegration Regression techniques. The causal relationship between the underlying variables is captured using the pair‐wise Granger causality test. To address the environmental issues, this study has made policy recommendations to revise trade policy, improve institutional quality, maintain a certain level of public debt, and ensure the new debt threshold level to maintain environmental performance.