Public Expenditure and Growth: The Indian Case

The paper deals with the analysis of the relationship between public spending and growth as well as the dynamics of the ratio public debt/GDP. We show that a composition of public spending that favours productive expenditures, i.e. those with a direct positive effect on the economy’s rate of growth, can determine a situation in which the ratio of the public debt to GDP is stable, even though the government runs primary deficits. We test our theoretical results by considering the Indian case that, for a number of reasons, appears to be consistent with our theoretical hypotheses and assumptions. The results of the empirical analysis substantially support the idea that the dynamics of the economy as well as of the ratio public debt/GDP are crucially contingent on having a public sector that favours productive expenditures. JEL classification: H30; H54; H60 Keywords: Public expenditure; Growth; Public debt