Government Expenditure and Economic Growth in India

Abstract

In the economies under transition there is a growing debate in favour of privatization rather than state owned enterprises. Government providing necessary public goods for which no competition exists from private sector can definitely lead to faster economic growth. But the onerous regulatory process, distortionary subsidies and taxes, delays in implementing projects, cost overruns are a limiting factor on economic growth. The paper examines the annual data on Government Final Consumption Expenditure and Gross National Product at market price in nominal and real terms of India for the period 1960-61 to 1999- 00. The causal relationship between the two variables is investigated by using the Test of Integration, Cointegration and Error Correction Mechanism. The main result of the study is that in nominal terms higher economic growth invariably is accompanied by an increase in the Government Final Consumption Expenditure.