Assessing Sectoral Growth Impact of Public Expenditure in India

The sectoral growth impact of public expenditure in India is unexplored, although it is important to perceive the efficacy of fiscal policy. In this light, this study delves into the impacts of aggregate and its functional components of public expenditures – namely development, non-development, revenue and capital expenditures, combined with money supply and price level surging income of primary, secondary, and tertiary sectors abreast of the national economy from 1985 to 2022. The long-run analysis based on the normalized cointegrating vectors identified by the Johansen approach to cointegration reveals that only the capital expenditure stimulates the income of the secondary and tertiary sectors and the national economy, while other components produce a detrimental impact. The short-run analysis based on the cointegrated vector autoregression (CVAR) model confirms that the aggregate expenditure and its components, namely development and revenue expenditures, surge national and secondary sector income. Importantly, neither the aggregate expenditure nor its components has a consequential impact on the primary sector income. The impulse response analysis confirms that the growth impacts of aggregate and functional components, as identified by CVAR results, are robust. The study identifies that the three sectors have distinct growth trajectories, with the public expenditure, where the trajectory of the secondary sector is similar to the national growth trajectory. Therefore, while assessing the growth impact of public expenditure, being abreast of the national economy and exploring the issue at the sectoral level are critically important. Otherwise, inferences will suffer from aggregation bias and be misleading.