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Investigation of Causality Relation between State Governments' Expenditure and GDP in India


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1 Assistant Professor, PG Dept. of Commerce, Mata Gujri College, Fatehgarh Sahib, Punjab, India
     

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This paper examines the causality relationship between state governments' expenditure and Gross Domestic Product (GDP at current prices) in India using a Toda-Yamamoto (1995) modified Granger causality procedure. The expenditure of the states as a percentage of GDP at current prices has also been calculated to know the contribution of state government expenditure in GDP of India. The annual time series data on GDP at current prices and state governments' expenditure are used for the study. Augmented Dickey fuller (ADF) unit root test is conducted to test the stationarity and to determine the order of integration of each variable. State governments' expenditure is significantly Granger cause GDP of India which supports the Keynesian approach but the Wagner's law is found to be invalid. The study shows the uni-directional causality relation running from state governments' expenditure to GDP. The empirical investigations suggest that state governments' expenditure has a significant and positive impact on economic growth in India.



Keywords

State Governments, Expenditure, GDP, Granger Causality, Toda-Yamamoto
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  • Investigation of Causality Relation between State Governments' Expenditure and GDP in India

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Authors

Rashpaljeet Kaur
Assistant Professor, PG Dept. of Commerce, Mata Gujri College, Fatehgarh Sahib, Punjab, India

Abstract


This paper examines the causality relationship between state governments' expenditure and Gross Domestic Product (GDP at current prices) in India using a Toda-Yamamoto (1995) modified Granger causality procedure. The expenditure of the states as a percentage of GDP at current prices has also been calculated to know the contribution of state government expenditure in GDP of India. The annual time series data on GDP at current prices and state governments' expenditure are used for the study. Augmented Dickey fuller (ADF) unit root test is conducted to test the stationarity and to determine the order of integration of each variable. State governments' expenditure is significantly Granger cause GDP of India which supports the Keynesian approach but the Wagner's law is found to be invalid. The study shows the uni-directional causality relation running from state governments' expenditure to GDP. The empirical investigations suggest that state governments' expenditure has a significant and positive impact on economic growth in India.



Keywords


State Governments, Expenditure, GDP, Granger Causality, Toda-Yamamoto

References