Nexus of Economic Growth and Public Expenditure in India

The major aim of the paper is to empirically examine the growth effects of public expenditure in the Indian context. The study utilizes annual time series data for the period spanning from 1981 to 2012. Fully-Modified Ordinary Least Square (FMOLS) and Dynamic Ordinary Least Square (DOLS) procedure of cointegration technique is applied to examine long-run equilibrium relationship among economic growth, public expenditure, and inflation. Two-stage Least Squares (2SLS) regression method is employed to check the stability of the parameters estimated by FMOLS and DOLS. Granger causality in VAR block exogeneity test is used to look into the short-run causal relationship among the considered variables. The major finding of the study shows increase in public expenditure leads to increase economic growth in the long-run and supports the Keynesian approach. In the short-run economic growth causes rise in public expenditure and a rise in public expenditure creates inflationary pressure in the economy. Both in the short-run and in the long-run inflation adversely affects economic well-being. In the short-run public expenditure fails to create the growth effect because of the inflationary effects of public spending which winds up growth effect.