Causality between Government Expenditure and Domestic Output: A Case Study of Indian States

Abstract

In this paper, the causality between different kinds of government expenditures and net state domestic products of 16 major Indian States is studied. This is to understand whether the Indian economy is showing evidence to the Wagner Hypothesis that states, with economic development the demand and thus supply of government services increases as against the Keynesian prescription where government expenditure is considered to be an effective policy tool to boost the domestic economy.Using time-series econometric tools like cointegration and long-run and short-run causality tests weak shreds of evidence of Wagner law for some of the Indian states are found. Overall a lack of concrete long-run (and/or even short-run) relationship between different kinds of government expenditures and Net State Domestic Products indicates an absence of a long-run comprehensive plan in designing of the government expenditures.