No abstract

The study examines the sustainability of public and external debt burden of Pakistan and India for the period 1971–2017. The debt dynamics equation for public debt uses two components for the analysis of public debt sustainability, namely, interest rate–growth rate differential and differential of primary budget balance-to-GDP and change of reserve money-to-GDP ratio. The equation for external debt dynamics also uses two components for the assessment of external debt sustainability, namely, current account balance-to-exports ratio and differential of exports growth and interest rate. The significance of the approach used in the current study lies in the fact that in case of evaluation of countries’ debt sustainability, it is quite necessary to monitor debt trends along with emerging domestic and external vulnerabilities and systemic risks that threaten debt sustainability. This phenomenon has been captured through debt dynamics approach, which is used in the current study. The results are based on the estimation of two equations, namely, debt dynamics equation for overall public debt sustainability and debt dynamics equation for external debt sustainability. The results of the study indicate that primary budget deficit and current account deficit have played a significant role in the accumulation of public debt and external debt, respectively in Pakistan and India. The study concludes that public debt and external debt of Pakistan and India are sustainable but in a weak form.

Fiscal policy is an essential ingredient of economic performance. The fiscal policy is considered as a short-run measure; however, this has long-lasting outcomes for any economy. The current study has examined the connection among different constituents of fiscal policy, i.e., federal government revenues and federal government expenditures; federal government revenues and different components of federal government expenditures; federal government expenditures and different components of federal government revenues and fiscal deficit and influential budgetary variables in the context of the economy of Pakistan. The study has empirically investigated the relationship among the budgetary variables for Pakistan from 1979 to 2017. For data analysis, time-series econometric techniques such as auto-regressive distributive lag (ARDL) approach and Granger causality test have been employed. The results of ARDL bounds test approach suggest the existence of long-run equilibrium relationship among the variables. The result of CUSUM and CUSUMSQ shows the stability of functional relationship tested in this study, which means that model is a useful instrument for policymaking. So, a rise or fall in budgetary variables causes changes in fiscal deficit in long run. The results of study endorse the proof of spent-and-tax hypothesis in the economy of Pakistan. The study suggests the need for extensive fiscal policy reforms in Pakistan.