Econometric investigation of relationships among Economic Growth, External Debt and External Debt Servicing in India: The Granger Causality Approach

The purpose of this paper is to empirically investigate the relationship among the economic growth, external debt and external debt servicing over the period 1979 to 2014 with the addition of a fourth economic variable that is exports to analyse the export led growth hypothesis in India. The study employs statistical techniques such as Augmented Dickey-Fuller (ADF) and Phillips-Perron (PP) unit root tests to check the order of integration, Johansen cointegration test to examine the long run relationship and Granger causality technique to investigate the existence and direction of causality among the variables. The study exhibits that all the variables have same order of integration and are stationary at first difference which allows for Johansen cointegration test and the result of the test supports the absence of long run relationship among the variables. The Pair wise Granger causality test showed that unidirectional causality runs from GDP per capita to external debt and external debt servicing, export to GDP per capita which supports the export led growth (ELG) hypothesis and external debt to external debt servicing. Thus, the health of the economy determines the demand for external debt and also the ability of a country to service its debt. From the policy point of view, it is recommended that export earnings could raise the economic growth rate and reduce the reliance of the economy on external debt.