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Government Expenditure and Economic Growth: Evidence from India

Ranjan Kumar Dash and Chandan Sharma

The IUP Journal of Public Finance, 2008, vol. VI, issue 3, 60-69

Abstract: The literature regarding the impact of government expenditure on economic growth is at best mixed. Given the conflicting results, we examine the impact of government developmental expenditure on India’s economic growth. Our study spans the period from 1950 to 2007. We have employed standard time series technique (unit root test and cointegration analysis) for our analysis. By applying Engle and Granger two-step methodology for cointegration analysis, we found that investment and trade have positive impact on economic growth, as their coefficients are significant at 5% level of confidence. The impact of government expenditure on economic growth, which is the focus of this study, is found to be positive and significant at 1% confidence level. From short run analysis, it is clear that government expenditure is also significant, indicating that it has a permanent and transitory effect. The Error Correction Model (ECM) term suggests that if we insert a shock into the model through one of these variables, approximately 33% of the deviation will be corrected within the first year. This is a rather slow adjustment process.

Date: 2008
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