We show that the implementation of the FRBM in 2003 had a salubrious effect on India’s debt trajectory: the primary deficit’s contribution to the change in the debt-GDP ratio during 1991–2003 was 20.9% compared to the period after the implementation of the act (2003–2018) where it fell to 10.8%. [...] Using the yield curve data from the Central Bank (Reserve Bank of India- RBI) we then calculate prices and the market value of the debt and subsequently undertake the debt decomposition along the lines of Hall and Sargent (1997, 2011). [...] These sub-periods contain major economic events specific to those decades (for example, the wars and drought of the sixties, the lost decade of the seventies, the tentative liberalization of the eighties, and the two decades following the post-liberalization period). [...] After the adoption of inflation tar- geting in 2014 the rise in public debt is about 3.7% reflecting a period when the decline in inflation contributed to an uptick in public debt.24 The variability in nominal returns on various tranches of the marketable portion of Centre’s debt (Figure 5) shows that the return on the 2-10 years maturity varied the most followed by the 10+ years tranche. [...] We show that nominal returns on the marketable and non-marketable portions of the Centre’s debt account for the highest contribution 34 Debt Decomposition and the Role of Inflation: A Security Level Analysis for India in explaining the change in public debt.
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