The complementarity of private consumption and government consumption in India

This paper examines the causal relationship between real private consumption and real government consumption in India using vector autoregressive approach. Based on Engle & Granger approach, the cointegration test indicates the existence of long run equilibrium between real private consumption and real government consumption. The impulse response function reveals that there is a weak though positive response in the private final consumption expenditure on account of one standard deviation shock in government final consumption expenditure. The result suggests that real government consumption expenditure has a positive effect on private consumption which is consistent with the Keynesians proposition. However, the relationship persists in the short term (till the 5^th quarter), while it dissipates by the 10^th quarter. Moreover, the response of private final consumption to the shock in GDP is observed to be high and persistent which indicates the high income elasticity of private consumption in India.