South Asian Journal of Macroeconomics and Public Finance

This article re-examines sovereign debt sustainability within a modern macro-financial framework that distinguishes mechanical debt arithmetic from policy-driven fiscal behaviour. While a negative interest–growth differential (r – g < 0) is a necessary condition for debt stabilization in the canonical debt identity, it is not sufficient when the fiscal policy operates under structurally persistent deficits. Using Japan over 1980–2023 as a long-horizon benchmark, the study combines conceptual insights with an accounting decomposition separating snowball effects from primary-balance contributions. Despite persistently favourable r – g differentials, Japan’s debt ratio rose steadily due to sustained primary deficits and crisis-related expansions. A Bohn-type fiscal reaction function shows a stabilizing but modest primary surplus response to rising debt, insufficient to halt long-run accumulation. The article also documents declining fiscal effectiveness as cyclical slack narrowed and supply constraints intensified. Overall, the findings emphasize institutional structure and macro-financial regimes over purely arithmetic interpretations of debt sustainability.

JEL Classification: E44, E62, H62, H63, O47

India’s Unified Payments Interface (UPI) has become one of the largest real-time payment systems in the world, yet currency with the public (CwP), defined as physical notes and coins held outside the banking system, has risen persistently alongside it. This article examines whether UPI transaction growth exerts an asymmetric effect on CwP using monthly data from August 2016 to March 2026 (116 observations) and the nonlinear autoregressive distributed lag (NARDL) model. The analysis is grounded in the transaction cost theory of payment instrument choice following Whitesell (1989), extended by the dynamic cash inventory model of Alvarez and Lippi (2009), which predicts that contractions in digital payment availability trigger precautionary currency accumulation disproportionately larger than the marginal reduction during normal expansion. The Consumer Price Index and the RBI policy repo rate are included as controls, and additive dummies address structural breaks from demonetization (November 2016) and COVID-19 (March 2020). The bounds test confirms cointegration (F = 7.507), and the Wald test confirms significant long-run asymmetry (F = 11.629, p = .001). Positive UPI shocks are associated with rising CwP in the long run, consistent with payment instrument complementarity rather than substitution, whereas negative shocks have a larger opposing effect, reflecting the precautionary motive. The error-correction coefficient of –0.374 indicates an approximately 37% monthly adjustment towards equilibrium. The findings have direct implications for the Reserve Bank of India’s monetary policy framework and India’s physical currency management agenda.

JEL Classification: E41, E52, O33, G21, E47

A puzzling characteristic of post-pandemic Indian inflation is the fall, within 10 years of adopting flexible inflation targeting (FIT), in core inflation to lifetime lows despite high growth and recurrent commodity price shocks. Establishing the credibility of FIT is expected to take time in emerging markets (EMs) since prerequisites are thought to include independent central banks (CBs) that focus only on inflation, giving up other types of intervention. The Indian CB, however, continued foreign exchange intervention and its coordination with the government improved over the period. Even so, our evidence from multiple exercises with a disaggregated industry panel suggests firms’ pass-through of supply shocks reduced in the FIT period. The results support the effectiveness of the communications and expectations channel in EMs compared to other channels. EM features imply prerequisites for successful FIT may not be the traditional ones. Flexible, not strict, inflation targeting, with procedures adapted to the context, can reduce growth sacrifice while lowering inflation.

JEL Classification: E31, E32

This article explores the effect of poverty on tax revenue performance (tax revenue share), using an unbalanced panel data set of 102 developing countries over the period from 1996 to 2015. Based on the two-step system generalized methods of moments (GMM) approach, the empirical analysis shows that higher poverty rates significantly reduce tax revenue performance in developing countries. However, the magnitude of this negative effect is lower in least developed countries (LDCs) than in other countries of the sample. The analysis has also revealed that the tax revenue performance effect of poverty depends on the level of household consumption as well as the prevailing unemployment rate in the economy. Finally, development aid inflows help to mitigate the negative effect of poverty on tax revenue performance in developing countries. These findings not only highlight the importance of poverty for tax revenue performance in developing countries, but they additionally show that the provision of higher amounts of development aid to these countries could help them mitigate the adverse tax revenue effect of poverty, and even allow them to enjoy higher tax revenue performance, which is key for attaining their development objectives.

JEL Classification: I30, I32, H20