Public Expenditure and Economic Growth in India - Causality Analysis

Posted: 23 Sep 2018

See all articles by Vijay Jariwala

Vijay Jariwala

Sardar Patel University - Department of Economics

Date Written: September 5, 2018

Abstract

The purpose of this study is to explore the relationship between public expenditure and economic growth in India using yearly time-series data from 1980-81 to 2015-16. Researchers often debated the relationship between public sector expenditure and its impact on economic growth. Even literature on public expenditure and growth relations found to be inconclusive. Two types of public expenditure- capital and revenue at market price along with the rate of gross capital formation rate haven experimented to find the causality on economic growth measured in Gross Domestic Product at market price (GDP). Standard technique of Granger causality has been used to find the causation. The results suggest that there has been unidirectional causality between log of Gross Capital Formation Ratio (LNGCFR) to log of GDP (LNGDP), LNGDP to log of revenue expenditure (LNREX), LNGCFR to LNREX and LNREX to log of capital expenditure (LNCEX). While there has been bidirectional causality found between LNCEX and LNGDP. The feedback effect of capital expenditure suggests for more focused view of policy makers towards this expenditure as it contributes to GDP. On the other hand GDP has unidirectional causation with revenue expenditure asked for cautious measures as increased in GDP contribute to revenue expenditure but not the other way round. These results are well in accordance with the standard theory of public finance.

Keywords: Capital Expenditure, Revenue Expenditure, GDP, Causality

JEL Classification: H5, C32, E64

Suggested Citation

Jariwala, Vijay Sureshchandra, Public Expenditure and Economic Growth in India - Causality Analysis (September 5, 2018). Available at SSRN: https://ssrn.com/abstract=3244191

Vijay Sureshchandra Jariwala (Contact Author)

Sardar Patel University - Department of Economics ( email )

V V Nagar
Anand, Gujarat 388120
India

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