Composition of social and economic services expenditure and economic growth: A second-generation panel data analysis of selected Indian states

One of the important objectives of public expenditure policy is to achieve sustainable economic growth. The effect of public expenditure on economic growth depends upon the nature and composition of public expenditure. The endogenous growth theories predict that effective government expenditure can increase countries’ economic growth irrespective of income levels or development stages. This study uses balanced panel data to investigate the impact of the composition of the social and economic services expenditures on economic growth for the fourteen major Indian States from 1990-91 to 2020-21. The sub-nationals are categorised into two panels, i.e., high and low-income. The results of long-run estimates, using Panel DOLS, revealed that the composition of social and economic services expenditure under the revenue expenditure account contributes more to economic growth than the composition of social and economic services expenditure under the capital outlay account in both the cross sectional dependent and slope heterogenous sub-national panels. Moreover, the composition of economic services expenditure contributes more to economic growth than social services expenditure. The result also validated the two alternative propositions, supporting two opposite directions of causality, one connecting economic growth to public spending (Wagner) and the other connecting public expenditure to economic growth (Keynesian) in the short run.