Continuous fiscal expansion financed through debt issuances poses important questions for fiscal sustainability and financial health of the country. It has important implication for effectiveness and efficiency of fiscal policy in restoring macroeconomic stability. The accumulated value of fiscal deficit at any point in time is public debt of a country. Public debt accumulation has important influences over the economy both in the short-run as well as the long run. There are different channels through which elevated and rising levels of public debt could impact the economy (Kaur and Mukherjee, 2014). It alters the allocation of resources between the private and the public sectors; exert pressure on long-term interest rates, reduced scope for countercyclical policies and vulnerabilities associated with debt buildup; reduced investment/capital accumulation; raises the risk of sovereign insolvency and may raises the inflation rates. In view of these expected adverse impact of high public debt, it is imperative to keep the public debt at manageable level and should not cross the required threshold level beyond which it may become unsustainable. In theoretical and empirical literature, the threshold level of debt is determined based on two strands of thought viz., debt-growth dynamics and fiscal/debt sustainability perspective in different countries over a period of time.
The persistent level of fiscal deficit in India has been a matter of concern for policy makers, researchers and public finance managers. The concerns over public debt sustainability were raised by the Twelfth Finance Commission and Reserve Bank of India. Since then many studies have analysed different aspect of rising public debt using variety of approaches. The present paper reviews the theoretical and empirical literature that has investigated the debt sustainability of public finance in India. The main objective of the paper is to know the current status of debt sustainability in India with a view to assess the scope of financial maneuvering for meeting different objectives of public policy in India.