Asian Economic and Financial Review, 2016, 6(11): 692-705 692 † Corresponding author DOI: 10.18488/journal.aefr/2016.6.11/102.11.692.705 ISSN(e): 2222-6737/ISSN(p): 2305-2147 © 2016 AESS Publications. All Rights Reserved. AN EMPIRICAL ANALYSIS OF EFFECT OF PUBLIC DEBT ON ECONOMIC GROWTH IN INDIA IN THE POST-REFORM ERA Asit Mohanty 1 --- Suresh Kumar Patra 2† --- Satyendra Kumar 3 ---- Avipsa Mohanty 4 1 Chair Professor, Centre of Excellence in Fiscal Policy and Taxation (CEFT), Xavier Institute of Management, Xavier University, Bhubaneswar, Odisha 2,3 Research Associate, Centre of Excellence in Fiscal Policy and Taxation (CEFT), Xavier Institute of Management, Xavier University, Bhubaneswar, Odisha 4 Ph.D. Scholar, Centre of Excellence in Fiscal Policy and Taxation (CEFT), Xavier Institute of Management, Xavier University, Bhubaneswar, Odisha ABSTRACT The present paper examines the causal nexus between public debt and economic growth for 15 NSC states of India for the period 1991-2015 using Dumitrescu Hurlin causality test. The panel causality test identified the endogeneity issue as it revealed the bidirectional causality between these two variables. Further, we revisited the effect of public debt on economic growth for NSC states for the same period by incorporating other controlled variables in the model. Understanding the potential endogeneity issue, we employed FMOLS which solves the endogeneity as well as serial autocorrelation problem in the model. The results of the present study revealed that public debt, total revenue receipts and total credit have favorable effect on economic growth. As regards policy implications, the government should adopt proper tax reform strategies to minimize tax leakages. Further, it should implement effective credit and risk management practices to improve the asset quality. Lastly, suitable debt management strategy should be adopted to utilize debt in the most effective and proficient way to expand productivity capacity of the economy. This, in turn, will sustain high economic growth in India. © 2016 AESS Publications. All Rights Reserved. Keywords: Public debt, Economic growth, Indian States, Dumitrescu Hurlin causality, Endogeneity, FMOLS. JEL Classification: H630, O4, R5, C33. Received: 15 July 2016/ Revised: 25 August 2016/ Accepted: 16 September 2016/ Published: 14 October 2016 Contribution/ Originality This study contributes to the existing literature by analyzing the causal nexus between debt and growth for 15 NSC States for India over the period 1991-2015 using Dumitrescu Hurlin causality test. We estimated the effect of public debt on economic growth applying FMOLS approach that solves potential endogeneity problem. 1. INTRODUCTION Whether public debt is a drag on the economic growth of a state or if it lends a vital nudge to economic growth, continues to remain a much mooted over puzzle. Particularly in a country like India where incurring public debt is a Asian Economic and Financial Review ISSN(e): 2222-6737/ISSN(p): 2305-2147 URL: www.aessweb.com