An empirical examination of the linkage between economic growth and government expenditure in India using aggregate and disaggregated expenditure

This paper attempts to study the association between government expenditures and economic growth for the Indian economy to test the applicability of Wagner’s law, for the post-liberalization period i.e. 1991-2021, using the ARDL bounds testing procedure. The study is conducted by using aggregate expenditure as well as disaggregated data of public expenditure i.e revenue and capital expenditure. To test the validity of Wagner’s law, two versions of Wagner’s law are used for this analysis, both with total expenditure as well as the revenue and capital expenditure (used individually). Econometric tests of stationarity, cointegration, and causality testing are conducted in all models. Empirical results indicate the presence of a long-run relationship of economic growth with expenditure variables (total expenditure, revenue expenditure, and capital expenditure taken separately). Causality results support causality from economic growth to the expenditure variables. On the whole, there does exist a long-run and stable relation between the expenditure variables and growth over the sample period, which is unidirectional from growth to expenditure, thus validating Wagner’s law in the case of both versions with total expenditure and revenue expenditure and one version with capital expenditure.