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Linkage between Income and Government Expenditure at Indian Sub-nationals: A Second Generation Panel Co-integration Techniques

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  • Nayak, Dinesh Kumar

    (National Institute of Public Finance and Policy)

  • Hazarika, Bhabesh

    (National Institute of Public Finance and Policy)

Abstract

The present paper examines whether the Wagner's law that represents the long-run relationship between income and public expenditure holds at the subnational level in India. The paper covers 21 Indian States and a time-period of 40 years from 1980-81 to 2019-20. The validity of the law was examined for nine different panels of states broadly under income categories and geographical regions. Unlike first-generation panel techniques which fails to account the aspects of cross-sectional independence and heterogeneity, the present study tests the validity of the Wagner's law using the second-generation panel unit root method and cointegration approach. The analysis adopts Panel Dynamic Ordinary Least Square to test the evidence of Wagner's law hypothesis. The findings reveal that Indian states are heterogeneous in terms of public expenditure, and there exists cross-sectional dependence. There also exists a long-run cointegrating relation between state-level income and state-level public expenditure. For the full sample, while this study finds holding Wagner's law, there is a mixed validity of the law at different panels across income categories and regions. In addition, it is observed that the validity of Wagner's law in the Indian Subnational context is mainly driven by the high-income major states, and it is more capital outlay centric.

Suggested Citation

  • Nayak, Dinesh Kumar & Hazarika, Bhabesh, 2022. "Linkage between Income and Government Expenditure at Indian Sub-nationals: A Second Generation Panel Co-integration Techniques," Working Papers 22/374, National Institute of Public Finance and Policy.
    • Handle: RePEc:npf:wpaper:22/374
    Note: Working Paper 374, 2022
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    1. Datta, Pritam & Dubey, Jay Dev & Choudhury, Mita, 2022. "Progressivity of Public Spending on Health care at the Sub-state Level in India: An Empirical Investigation in Tamil Nadu and Bihar," Working Papers 22/375, National Institute of Public Finance and Policy.

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    More about this item

    Keywords

    Wagner's Law ; Second Generation Panel Root and Co-integration Tests ; Indian States;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures

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