Impact of Government Expenditure on Economic Growth in India – An Econometric Enquiry over the Period 1970-2012

Abstract

This article focuses on the literature related to the debate on the Wagner Hypothesis and the Keynesian Hypothesis. This study examines the existence of any short-run and long-run relationship between economic growth and government expenditure in India over the period 1970-2012. Economic growth (Yt) and government expenditure (Et) are found to be stationary variables and both the series are I(0).There exists a long-run relationship between economic growth and government expenditure. The study with VAR model confirms no causal relationship supporting the Wagner Hypothesis and the Keynesian Hypothesis. The Impulse Response Functions indicate that govt. expenditure shocks were short-lived for economic growth and economic growth shocks were shortlived for govt. expenditure. Variance Decomposition study firmly confirms that govt. expenditure shocks were not important for short-run variations in economic growth (Keynesian Hypothesis) and economic growth shocks were also not important for raising govt. expenditure (Wagner Hypothesis).