The Validity of Wagner’s Law in India: A Post-liberalisation Analysis
South Asian Journal of Social Studies and Economics,
Aims: The present study attempts to analyse the behavior of government expenditure in relation to national income using most appropriate advanced econometric techniques to test the Wagner’s law of increasing State’s activity in Indian scenario during the post-liberalisation period of 1988 to 2017.
Data: The study uses the IMF database entitled “International Financial Statistics” and World Bank database entitled “World Development Indicators” for testing Wagner’s law for the Indian economy.
Methodology: The study employs appropriate econometric techniques to our model where government expenditure is used as regressand and gross domestic product and urbanisation is used as regressors. The study first investigates for unit roots in data using ADF and PP tests. Further, to investigate any co-integration among variables the study employed Johansen co-integration test. Once co-integration is confirmed, a vector error correction model has been estimated and lastly, Granger causality test is applied to check for any causality.
Results: The results of Vector Error Correction Model reveal that both the Gross Domestic Product and the urban population have a positive and statistically significant effect on government expenditure in the long-run. Ceteris paribus, every 1.0 percent increase in GDP leads 0.36 percent increase in government expenditure. On the other hand, 1.0 percent increase in urban population leads to a 3.75 percent increase in government expenditure. The Granger causality results divulge that there is unidirectional causality running from urban population to government expenditure, whereas neither unidirectional nor bidirectional causality was found between GDP and public expenditure. In short-run, neither GDP nor urban population influences public expenditure.
Conclusion: To sum up, the present investigation provides support for Wagner’s law in case of India in the long run only. It has been found that urbanisation has a greater impact on public expenditure than the national income (GDP) and which is also supported by Granger causality test showing significant unidirectional causality running from level of urbanisation to government expenditure.
- Government expenditure
- Wagner’s law
- gross domestic product
- error correction model
How to Cite
Wagner A. Grundlegung der politischen Ökonomie. 3rd Ed. Leipzig, Winter; 1893.
Wagner A. Zur Methodik der Statistik des Volkseinkommens und Volksvermögens. Zeitschrift der Königlich-Preussischen Statistischen Bureaus.1904;41-45.
Wagner A. Staat in nationalökonomischer Hinsicht. Handwörterbuch der Staatswissenschaften, 3rd ed. Book VII. Jena: Lexis. 1911;743-745.
Peacock A, Scott A. The Curious Attraction of Wagner's Law, Public Choice. 2000;102(1):1-17.
Dutt SD, Ghosh D. An empirical examination of the public expenditure – economic growth correlations. Southwest Oklahoma Economic Review. 1997;12(4):14-26.
Musgrave RA. Fiscal Systems. New Heaven and London, Yale University Press; 1969.
Lybeck JA. The growth of government in developed countries, London: Gower; 1986.
Hook E. The expansion of the public sector: A study of development of public expenditures in Sweden during the years 1912-1958. Public Finance. 1962;17:289-312.
Mann AJ. Wagner's law: An econometric test for Mexico, 1925-1976. National Tax Journal. 1980;33(2):189-201.
Gould F. The development of public expenditures in Western industrialised countries: a comparative analysis. Public Finance. 1983;38(1):38-69.
Neck R, Schneider F. The growth of public expenditure in Austria: An exploratory analysis. Explaining the Growth of Government. Amsterdam Eds. Lybeck JA, Henrekson M. North-Holland; 1988.
Paldam M, Zeuthen HE. The expansion of the public sector in Denmark – A post festum. Explaining the Growth of Government. Amsterdam Eds. Lybeck JA, Henrekson M. North-Holland; 1988.
Yousefi M, Abizadeh S. Growth of state government expenditures: Empirical evidence from the United States. Public Finance. 1992;47:322-339.
Hackl F, Schneider F, Withers G. The public sector in Australia: A quantitative analysis. The Growth of the Public Sector Eds. N. Gemmell. UK: Edward Elgar; 1993.
Adedokun A, Olaniyi CO. Nigeria Economic Recess Versus Wagner’s Law and Keynesian Proposition. International Journal of Economics & Management Sciences. 2017;6(3).
Saleh AS, Verma R, Ihalanayake R. A validation of Wagner's Law: A Case Study of Sri Lanka. International Journal of Economics and Business Research (IJEBR). 2017;14(1):29-43.
Hallim H. Testing of Wagner’s Law for Industria (G7) Countries; 2018.
Gupta SP. Public expenditure and economic growth, a time series analysis. Public Finance. 1967;22:423- 466.
Bird RM. Wagner's law of expanding state activity. Public Finance. 1971;26(1):1-26.
Goffman IJ, Mahar D. The growth of public expenditures in selected developing nations: six Caribbean countries 1940-65. Public Finance. 1971;26(1):57-74.
Henning JA, Tussing AD. Income elasticity of demand for public expenditures in the United States. Public Finance. 1974;29(3-4):325-341.
Ganti S, Kolluri BR. Wagner's law of public expenditures: Some efficient results for the United States, Public Finance. 1979;34(2):225-233.
Beck M. Public expenditure, relative prices and resource allocation. Public Finance. 1985; 40(1):17-34.
Vatter HG, Walker JF. Real public sector employment growth, Wagner's law and economic growth in the United States. Public Finance. 1986;41(1):116-138.
Khan AH. Public spending and deficit: Evidence from a developing economy. Public Finance. 1988;43(3):396-402.
Ram R. Wagner's hypothesis in time-series and cross-section perspectives: Evidence from 'real' data from 115 countries. Review of Economics and Statistics. 1987:69(2):194-204.
Henrekson M. Wagner's law – A spurious relationship? Public Finance. 1993;48(3):406-415.
Sekantsi LP, Molapo S. Testing the Validity of Wagner's Law in Lesotho; 2017.
Wagner RE, Weber WE. Wagner's law, fiscal institutions and the growth of government. National Tax Journal. 1977;30(1):59-68.
Chrystal A, Alt J. Endogenous government behaviour: Wagner's law or gotler dammerung? Current Issues in Fiscal Policy Eds. S.T. Cook and P.M. Jackson. Oxford: Martin Robertson; 1979.
Pluta JE. Real public sector growth and decline in developing countries. Public Finance. 1981;36(3):439-454.
Ram R. Causality between income and government expenditure: A broad international perspective. Public Finance. 1986;41(3):393-414.
DeLorme CD, Cartwright PA, Kespohl E. The effect of temporal aggregation on the test of Wagner's law. Public Finance. 1988;43(3):373-387.
Saunders P. Explaining international differences in public expenditure: An empirical study. Public Finance. 1988;43(2):271-294.
Gemmell N. The growth of the public sector. UK, Edward Elgar; 1993.
Craigwell R. Government deficit and spending in Barbados: An empirical test of the Buchanan-Wagner hypothesis. Public Finance. 1991;46:373-381.
Hondroyiannis G, Papapetrou E. An examination of Wagner's law for Greece: A cointegration analysis. Public Finance. 1995;50(1):67-79.
Mohammadi H, Rati R. Economic Development and Government Spending: An Exploration of Wagner’s Hypothesis during Fifty Years of Growth in East Asia. Economies. 2015;3(4):150-160.
Ogbonna BC. Testing for Wagner's Law on Greek Economy. International Journal of Development and Economic Sustainability. 2015;3(5):26-35.
Keho Y. Testing Wagner’s Law in the Presence of Structural Changes: New Evidence from Six African Countries (1960-2013). International Journal of Economics and Financial Issues. 2016;6(1):1-6.
Phiri A. Nonlinearities in Wagner’s law: Further evidence from South Africa. MPRA .2016; 71702.
Budhedeo SH. Cointegration, Causality and Wagner’s Law: An Econometric Analysis for India. Research Journal of Humanities and Social Sciences. 2018;9(4):785-792.
DOI: 10.5958/2321 5828.2018.00132.8
Jaen M. Wagner's law: A Revision and a New Empirical Estimation. Review of Public Economics. 2018;224-(1/2018):13-35.
Paparas D, Ritcher C. A synthesis of empirical research on the validity of Wagner's law. International Journal of Business and Globalisation. 2019;22(4):555-583.
Lindauer DL. The Size and Growth of Government Spending. Policy, Planning, and Research. Working Papers Wold Development Report; 1988.
Blot D, Debeauvais M. Educational expenditures in developing areas: some statistical aspects. Financing of Education for Economic Growth Eds. Lucille Reifman. Paris, Organization for Economic Co-operation and Development; 1966.
Singh B, Sahani BS. Causality between public expenditure and national income. The Review of Economics and Statistics. 1984;66(4):630-644.
Upendra M, Ramakrishan G. Wagner’s law of public expenditure: Indian experience. Finance India. 1994;8(3):635-647.
Lalvani M. Non-parametric approach to studying Wagner’s law for the Indian Economy. Journal of Indian School of Political Economy. 1995;7(2):277-295.
Singh G. Wager’s law: A time series evidence from Indian economy. The Indian Journal of Economics. 1997;77(306): 349.
Sahoo P. Wagner’s hypothesis: Further empirical evidence from India. Journal of Indian School of Political Economy. 2001;13(1):45-53.
Srinivasan P. Causality between Public Expenditure and Economic Growth: The Indian Case. Int. Journal of Economics and Management. 2013;7(2):335-347.
Bhat KS, Nirmala V, Kamaiah B. Causality between public expenditure and national income in India. Margin. 1991;23(4):333-341.
Mohsin Md, Naidu CR, Kamaiah B. Wagner’s hypothesis: Evidence from Indian states. The Indian Economic Journal. 1995;43(1):76-92.
Verma S, Arora R. Does the Indian economy support Wagner’s law? An econometric analysis. Eurasian Journal of Business and Economics. 2010;3(5):77-91.
Narayan S, Rath BN, Narayan PK. Evidence of Wagner's law from Indian states. Economic Modelling. 2012;29(5):1548-1557.
Kirandeep K, Umme A. Testing Wagner's Law in India: A cointegration and causality analysis, Communications in Statistics - Theory and Methods. 2017;46(17):8510-8520.
Chandra R. Government size and economic growth: An Investigation of Causality in India. Indian Economic Review. 2004;39(2):295-314.
Pradhan RP. Wagner’s Law: Is It Valid in India? The IUP Journal of Public Finance. 2007;0(2):7-20.
Adil MH, Ganaie AA, Kamaiah B. Wagner’s Hypothesis: An Empirical Verification. IIM Kozhikode Society & Management Review. 2017;6(1):1–12.
Granger CJ. Investigating causal relations by econometric models and cross-spectral methods. Econometrica. 1969;37(3):424-438.
Gujarati DN. Basic Econometrics. New York, McGraw-Hill; 1995.
Toda HY, Yamamoto T. Statistical inference in Vector Autoregressions with possibly Integrated Processes. Journal of Econometrics. 1995;66(1–2):225–250.
Dolado JJ, Lutkepohl H. Making Wald Test Work for Cointegrated VAR Systems. Econometric Reviews. 1996;15(4):369–386.
Abstract View: 2738 times
PDF Download: 861 times