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2023 | OriginalPaper | Chapter

5. The Relationship Between Government Revenue, Government Expenditure and Economic Growth in India: An Empirical Investigation at the Sub-national Level

Authors : Deba Prasad Rath, Samir Ranjan Behera, Bichitrananda Seth, Anoop K. Suresh, Rachit Solanki

Published in: India’s Contemporary Macroeconomic Themes

Publisher: Springer Nature Singapore

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Abstract

This paper examines the relationship between government revenue, expenditure, and economic growth for Indian States in a panel framework while also identifying the drivers of States’ primary expenditure. On the one hand, the study confirms a long run relationship between revenue and expenditure thereby supporting ‘fiscal synchronization’ hypothesis whereas on the other, the existence of a long run association between expenditure and economic growth is detected providing support to the ‘Wagner's law’. Given the importance of primary expenditure in the overall expenditure, the study finds that the States’ primary expenditure has a persistent effect, with past decisions on primary expenditure influencing current-year decisions. States pursue countercyclical expenditure policy in case of positive and negative output gaps, with more pronounced countercyclicality during negative output gap periods. Regarding the States’ sensitivity to their debt levels, the study finds States responding to the level of debt countercyclically in case of positive output gap. The study recommends increasing capital expenditure and debt reduction during phases of positive output gaps to ensure long-term fiscal sustainability of Indian States.

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Appendix
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Footnotes
1
Wagner’s Law states that public expenditure increases as economic growth rises.
 
2
They comprise of Andhra Pradesh (including Telangana), Bihar, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, and West Bengal.
 
3
Total expenditure considered for empirical investigation is primary government expenditure which is the summation of primary revenue expenditure (i.e., government expenditure excluding interest payment) and capital outlay.
 
4
Among these four-unit root tests employed in this study, the LLC test is based on augmented dickey-fuller (ADF) test and is the most popular one. On the other hand, the IPS test relaxes the homogeneity assumption of LLC test and permits for heterogeneity in the autoregressive coefficients for all panel members. However, when individual specific trends are included, it is possible that the results of the IPS test may be affected (viz., loss of power) attributable to bias correction. Hence, two additional tests are also undertaken in this study for ensuring the stationarity of the variables (viz., ADF-Fischer Chi square and PP-Fischer Chi-square) which rectifies for the loss of power issue.
 
5
The threshold of debt-GSDP ratio at 25% is chosen based on the average of the ratios from 2015–16 to 2019–20 of all States. This ratio, however, does not represent an optimal level of debt or sustainable level of debt.
 
6
The debt coefficient corresponds to the slope of debt when the output gap is negative, and although it is positive, it is statistically insignificant; thus, its value may be considered zero. In contrast, the coefficient of the interaction term is -0.04, and when added to the coefficient of debt (which is 0.01, or effectively zero), the resulting slope coefficient of debt when the output gap is positive is also -0.04.
 
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Metadata
Title
The Relationship Between Government Revenue, Government Expenditure and Economic Growth in India: An Empirical Investigation at the Sub-national Level
Authors
Deba Prasad Rath
Samir Ranjan Behera
Bichitrananda Seth
Anoop K. Suresh
Rachit Solanki
Copyright Year
2023
Publisher
Springer Nature Singapore
DOI
https://doi.org/10.1007/978-981-99-5728-6_5