Assessing the macroeconomic impact of fiscal deficit in India: evidence from ARDL approach

Prakhar Pandey and Rajnish Pande
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Prakhar Pandey: Kumaun University, India
Rajnish Pande: Kumaun University, India

Theoretical and Applied Economics, 2025, vol. XXXII, issue 3(644), Autumn, 271-286

Abstract: This paper examines the dynamic interaction between economic growth in India and fiscal deficit data between the years 1970 and 2021 through the use of the Autoregressive Distributed Lag (ARDL) bounds testing method. Based on the theoretical framework of the Neoclassical school of thought, the paper will seek to learn whether fiscal deficit is either a stimulus to long-term growth or a limiting factor. Surprisingly, empirical findings have indicated that fiscal deficit as a percentage of GDP negatively influences the long-run growth at a statistically significant level. This favours the crowding-out theory that where a government borrows too much, it can force out any private investment by reducing economic growth. Gross capital formation, broad money supply, and trade openness in the short run however, demonstrate several mixed and varying effects on growth, representing the intricacies of the interactions of various variables in the macroeconomic setting. The model assumes that diagnostic tests involving no serial correlation, homoscedasticity, and normal residuals are met; hence, estimates are reliable. The results show the essence of prudent fiscal management. To achieve inclusive and stable growth in India, policymakers ought to focus on measures that imply decreasing structural deficits, increasing the quality of public spending, and striking a compromise between temporary economic demands and long-term sustainability.

Keywords: fiscal deficit; economic growth; ARDL; public finance. (search for similar items in EconPapers)
Date: 2025
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