Public Sector Spending and Economic Growth in India

The paper analyses the dynamic interaction between the public sector expenditure and national income in India for the period 1960-61 to 1996-97. It finds a stable long-run relationship between public sector expenditure and national income in India, with the causality running strictly from the former to the latter. The study also indicates that long-run positive impact of public sector expenditure on national income would turn adverse if the growth of the former is excessive. In the short-run, however, there is a trade-off between growth in public sector expenditure and income. Thus, though national income growth in India seems to be investment or demand led, there is the need for maintaining a proper balance between public sector expenditure and investment for economic growth.