An empirical investigation of public debt and capital accumulation nexus in southasian countries

The growing public debt burden has now become a common feature of South Asian countries. The present study aims to investigate the impact of public debt on capital accumulation in South Asian countries i.e., Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. For this purpose, 30 years panel data of these countries from 1990 to 2019 has been used. Fixed effect model has been used to estimate two models carrying various debt indicators. The outcomes of the study exhibit that there exists a negative relationship between public debt stock as a ratio of total revenue and capital accumulation and public debt servicing as a ratio of total revenue and capital accumulation. Further public debt and public debt servicing as a ratio of export earnings also exhibit a negative association with the stock of capital. The study result led to support the existence of debt overhang hypothesis in South Asian countries. The debt overhang hypothesis postulates that large debt stock decreases the process of capital formation in the country. The results of some other debt indicators, namely, public debt to exports ratio, public debt service to export ratio retard the process of capital formation in South Asian countries. Economic growth, financial development and human capital stimulate capital formation while inflation has a negative impact on capital formation. The study suggests that public debt will be utilized effectively and productively in public sector development projects to accelerate the pace of capital formation in South Asian countries