The Relationship Between Government Revenue, Government Expenditure and Economic Growth in India: An Empirical Investigation at the Sub-national Level

Deba Prasad Rath (), Samir Ranjan Behera (), Bichitrananda Seth (), Anoop K. Suresh () and Rachit Solanki ()
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Deba Prasad Rath: Reserve Bank of India
Samir Ranjan Behera: Reserve Bank of India
Bichitrananda Seth: Reserve Bank of India
Anoop K. Suresh: Reserve Bank of India
Rachit Solanki: Reserve Bank of India

Chapter Chapter 5 in India’s Contemporary Macroeconomic Themes, 2023, pp 89-121 from Springer

Abstract: Abstract This paper examines the relationship between government revenue, expenditure, and economic growth for Indian States in a panel framework while also identifying the drivers of States’ primary expenditure. On the one hand, the study confirms a long run relationship between revenue and expenditure thereby supporting ‘fiscal synchronization’ hypothesis whereas on the other, the existence of a long run association between expenditure and economic growth is detected providing support to the ‘Wagner's law’. Given the importance of primary expenditure in the overall expenditure, the study finds that the States’ primary expenditure has a persistent effect, with past decisions on primary expenditure influencing current-year decisions. States pursue countercyclical expenditure policy in case of positive and negative output gaps, with more pronounced countercyclicality during negative output gap periods. Regarding the States’ sensitivity to their debt levels, the study finds States responding to the level of debt countercyclically in case of positive output gap. The study recommends increasing capital expenditure and debt reduction during phases of positive output gaps to ensure long-term fiscal sustainability of Indian States.

Keywords: Government revenue; Government expenditure; Economic growth; Panel co-integration; C40; H20; H50; O40 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isbchp:978-981-99-5728-6_5

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DOI: 10.1007/978-981-99-5728-6_5

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