Abstract: The purpose of this study is to assess, in Indian context, the validity of ‘Wagner’s law” which has spawned a large number of empirical studies because of its important implications. According to Wagner, expenditure is an endogenous factor or outcome of growth process during industrialisation. As real national income increases there is a tendency for the public expenditure to increase relative to national income. To investigate this long run relationship between government expenditure and national income we employed Engel –Yoo three step cointegration methods along with Augmented Dickey Fuller (ADF) test and Engel –Granger causality test, on time series annual data for Indian economy over the period from 1980-81-to 2012-13. We found a unidirectional causality running from GDP/GDP per capita to public expenditure thus supporting Wagner’s hypothesis of increasing public sector in India. Since there is no causality running from government expenditure to GDP, using public expenditure as effective policy instrument for long run economic growth is not supported by this empirical exercise? Although this paper makes use of only two prominent specifications for testing Wagner’s law, a brief description of other commonly used models, with necessary conditions is also given in the main text.
Keywords: Wagner’s law, Public Expenditure, Engel-Yoo cointegration, GDP growth, Government Size, JEL Classification H52, C22, E62.
Title: Government Expenditure and Economic Growth: An Econometric Test for India
Author: MASROOR AHMAD
International Journal of Social Science and Humanities Research
ISSN 2348-3164 (online), ISSN 2348-3156 (Print)
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