An Empirical Investigation of the Causality between Government Expenditure and Economic Growth in India during 1974-2010

The role of government spending in economic growth is always an issue of debate.Various studies across the world have tried to investigate how government spending can influence the growth of an economy and found various results.While some studies found a positive impact of government spending on growth some found a negative impact.Some researchers also found that there is no significant long term relationship between public spending and growth.This paper attempts to examine the relationship between government spending and GDP growth in India using annual data for the period 1974-2010, under the framework of cointegration and vector error correction mechanism.This study shows evidence of a long run equilibrium relationship between spending and growth in India.The findings also support a unidirectional causality from expenditure to GDP and thereby validate the applicability of Wagner's law in India.