Fiscal Deficit and Economic Growth Nexus in India: A Simultaneous Error Correction Approach

Ranjan Kumar Mohanty ()
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Ranjan Kumar Mohanty: Xavier University Bhubaneswar

Journal of Quantitative Economics, 2020, vol. 18, issue 3, No 9, 683-707

Abstract: Abstract This paper examines the impact of fiscal deficit on economic growth in India, during the period from 1970–71 to 2018–19. Using a combination of Autoregressive Distributed Lag and Simultaneous Error Correction Approach, this study shows that fiscal deficit and revenue deficit have an adverse effect on economic growth both in the long run and in the short run. The empirical analysis confirms that fiscal deficit influences economic growth both directly, and indirectly through the routes of investment, interest rate, current account deficit and composition of government expenditure. Further, gross investment has a positive and inflation rate has a negative impact on economic growth. For a policy perspective, the government should control fiscal deficit and revenue deficit as suggested by the FRBM Act. The composition of government expenditure should be altered to devote more resources for the formation of productive capital in India.

Keywords: Fiscal deficit; Revenue deficit; Economic growth; Autoregressive distributed lag (ARDL) model; Simultaneous error correction approach; C32; H62; O40 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s40953-020-00211-1

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