Evidence of Wagner’s Law in India Using Time Series from 1960 to 2018

Aims: The present study attempts to analyse the behaviour of government expenditure in relation to income using most appropriate advanced econometric techniques to test the Wagner’s law of increasing State’s activity in Indian scenario during the period of 1960 to 2018.  Data: The study uses the IMF database entitled “International Financial Statistics” and World Bank database entitled “World Development Indicators” for testing Wagner’s law for the Indian economy.  Methodology: The study employs appropriate econometric techniques to our model where government expenditure is used as regress and and gross domestic product per capita and urbanisation is used as regressors with a dummy capturing pre and post liberalization effect. The study first investigates for unit roots in data using ADF and PP tests. Further, to investigate any cointegration among variables the study employed Johansen co-integration test. Once co-integration is confirmed, a vector error correction model has been estimated and lastly, Granger causality test is applied to check for any causality. Results: The results of Vector Error Correction Model reveal that both the gross domestic product per capita and the urban population have a positive and statistically significant effect on government expenditure in the long-run. Ceteris paribus, every 1.0 percent increase in GDP per capita leads 0.57 percent increase in government expenditure. On the other hand, 1.0 percent increase in urban population leads to a 2.23 percent increase in government expenditure. The Granger causality results divulge that there is unidirectional causality running from both GDP per capita to government expenditure and from urban population to government expenditure. In short-run, first lag of government expenditure and second lag of urban population influences public expenditure. Dummy coefficient shows that liberalization policies adopted in 1991 in negatively affected the government expenditure but the effect is not significant.  Conclusion: To sum up, the present investigation provides support for Wagner’s law in case of India in the long run only. It has been found that urbanisation has a greater impact on public expenditure than GDP per capita and which is also supported by Granger causality test showing significant unidirectional causality running from GDP per capita to government expenditure and level of urbanisation to government expenditure.

Author(s) Details

Dr. Suraj Sharma
Department of Economics, S.M. (P.G.) College, Chandausi, Uttar Pradesh (Affiliated to M.J.P Rohilkhand University, Bareilly, U.P.), India

Surendra Singh
Department of Economics, Government Girls College, Raisen, Madhya Pradesh (Affiliated to Barkatullah University, Bhopal, M.P.), India.

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