On the Relationship between Government’s Developmental Expenditure and Economic Growth in India: A Cointegration Analysis

Sarbapriya Ray

Abstract


The paper tries to assess empirically the nexus between government’s developmental expenditure and economic growth in
India using annual data over the period 1961-62 to 2009-10. The paper is based on the following hypotheses for testing the causality
and co-integration between GDP growth and government’s developmental expenditure in India as to whether there is bi-directional
causality between GDP growth and govt. spending or whether there is unidirectional causality between the two variables or whether
there is no causality between GDP growth and govt. spending in India or whether there exists a long run relationship between GDP
growth and govt. spending in India. Time-series econometric techniques like Granger causality and cointegration, error correction
model are applied to test the hypothesis. The cointegration test confirmed that economic growth and government’s developmental
expenditure are co integrated that indicates an existence of long run equilibrium relationship between the two as confirmed by the
Johansen cointegration test results. The Granger causality test finally confirmed the absence of any kind of short run causality
between economic growth and developmental expenditure of government which neither supports Keynesian approach nor Wagner’s
law. The error correction estimates gave evidence that developmental expenditure of government (DEV) and GDPgrowth are
mutually causal


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