Does the Indian Economy Support Wagner’s Law? An Econometric Analysis

The present study endeavors to examine the validity of Wagner’s Law in India over the period 1950/51 to 2007/08. Six versions of Wagner’s hypothesis given by different economists have been estimated which support the existence of long-run relationship between economic growth and growth of public expenditure. Two structural breaks have also been given to test the impact of structural changes in Indian economy on the growth of public expenditure. It has been found that the first structural break given for mild-liberalization period causes insignificant changes in the growth elasticity of public expenditure. However, the observed change in the elasticity due to the second phase of intensive liberalization is statistically significant. Nevertheless, the Wagner’s law is still supported during the intensive phase of liberalization given a significant fall in the elasticity. Empirical evidences regarding the short-run dynamics refute the existence of any relationship between the economic growth and the size of the government expenditure.