N.A. Khan* and Bineetha P. Bose
Affiliation: School of Economics, University of Hyderabad, Hyderabad, India
*Email: [email protected]
Abstract: The external debt burden of India is mounting when the country’s external debt to GDP ratio reached about 19.8 percent during 2019-20. The study uses the Granger Causality analysis to bring out the causal relationship between external debt and the three deficit which takes the form of three gaps. About six pairs of hypotheses are formulated to detect the nature of causation between the saving-investment gap, fiscal gap, foreign exchange gap on the one hand and the annual flows of external debt in India on the other. The conclusions emerging from the Granger’s tests of causality are significant. Surprisingly, the theoretical relationship between the saving-investment gap and the foreign exchange gap is not supported in the Indian context.
Keywords: External Debt; Growth; Saving Investment Gap; Foreign Exchange Gap; Granger Causality Test; India JEL Classifications: C12, O40, F31, F34.