Size of Expenditure Multipliers for Indian States: Does the Level of Income and Public Debt Matter?

In this paper we apply panel vector error correction model to analyze the role of debt burden and income level in determining expenditure multipliers of Indian states. Our main results based on annual data from 1990-91 to 2015-16 suggest that the size of multiplier is sensitive to expenditure composition, debt level and the per capita income. The development expenditure multiplier is found to be 1.74 times of total expenditure multiplier. Further, the multipliers are found to be larger for low debt states than the high debt states, for both total expenditure and development expenditure. The impact of income on multiplier is, however, asymmetric across expenditures. While total expenditure multiplier is higher for low income states, development expenditure multiplier is found to be highest in high income states.