Government Expenditure and Inflation in India: An Empirical Analysis
| Published date | 01 December 2024 |
| DOI | http://doi.org/10.1177/00195561241248281 |
| Author | Anshul Srivastava,Karuna Shanker Kanaujiya,Preeti Kannoujia |
| Date | 01 December 2024 |
Government Expenditure
and Inflation in India:
An Empirical Analysis
Anshul Srivastava1, Karuna Shanker Kanaujiya1
and Preeti Kannoujia1
Abstract
In any economy, inflation increases with an increase in economic growth and gov-
ernment size. However, when inflation increases beyond a certain undesirable
level, it becomes a problem for the economy and hurts economic growth. The
central bank uses various techniques to tackle inflation and reduce the possibil-
ity of harmful increase in it. Since India is a developing country, the government
expenditure plays a crucial role and provides an important stimulus to economic
growth. The main focus of this study is on the correlation between government
spending and inflation in the country and its impact over the period 1983–2020.
Along with that, the impact of gross domestic product and money supply has also
been studied for the same time period. The results of the study suggest that in
India, increase in an government expenditure causes an increase in inflation, and
the other two variables also share a similar relationship with inflation.
Keywords
Public expenditure, inflation, money supply, consumer price, GDP
Introduction
The general meaning of government expenditure (GE) is that it refers to the
expenditure incurred by the government of a country for its own working and
maintenance as well as to assure the collective needs of the citizens of the country.
It is aimed at increasing the growth of the overall economic activities of a country
and fullling the basic requirements of citizens through various policies. The
choice of monetary and scal policies also depicts the behavioural approach of the
Article
Indian Journal of Public
Administration
70(4) 860–875, 2024
© 2024 IIPA
Article reuse guidelines:
in.sagepub.com/journals-permissions-india
DOI: 10.1177/00195561241248281
journals.sagepub.com/home/ipa
1 Department of Applied Economics, University of Lucknow, Uttar Pradesh, India
Corresponding author:
Karuna Shanker Kanaujiya, Department of Applied Economics, University of Lucknow, Lucknow,
Uttar Pradesh 226007, India.
E-mail: dr.karunashanker@gmail.com
Srivastava et al. 861
government towards economic growth. It is well known that the Classical and the
Keynesian economists had dierent views on GE and intervention. The Classical
economists believed in ‘laissez-faire’ policy and argued that government inter-
vention was not required in the market. The classical dichotomy states that a rise
in total monetary supply results in a corresponding rise in all monetary prices,
without any alteration in resource allocation or real gross domestic product (UK
Essays, 2018). Neo-classical economists have the view that increased GE may
lead to an increase in ination.
The Keynesian view (1936) provides great importance to public expenditure
and says that it provides stability to the economy and stimulates productivity and
investment. According to Keynes, the government’s role is essential because it
can prevent depression by boosting aggregate demand and thereby re-energising
the economy through the multiplier eect; it is a stabiliser in the short term, but
this must be done carefully because too much public spending leads to ination,
while too little leads to unemployment (Keynes, 1936). Along with the Keynesian
and Classical views on GE, it is important to consider several theories that explain
the increasing trend behind expenditure and explore the reasons and causes behind
the increase. In this context, there are two main theories that are relevant, namely,
Wagner’s Law and Peacock–Wiseman Hypothesis.
The law of increasing state activity was developed by German political econo-
mist Adolf Wagner. Wagner empirically analysed the situation of Western Europe at
the end of the 19th century and argued that when an economy is in industrialisation,
the proportion of public expenditure in overall expenditure increases with an
increase in real per capita income. According to Wagner (1893), government growth
is a result of industrialisation and economic growth, and the law cited is ‘The advent
of modern industrial society will result in increasing political pressure for social
progress and increased allowance for social consideration by industry’.
Wagner (1893) proposed a few main reasons for the rise in state spending.
First, during the process of industrialisation, public sector activities will replace
the activities of the private sector. Second, state functions, such as administration
and defence, will become more important. Third, governments will need to
provide social and welfare services, such as education and health care, old-age
pensions or retirement plans, food subsidies, natural disaster assistance, environ-
ment protection programmes and other social and welfare functions. Therefore,
industrialisation will lead to technological change and monopolisation by large
rms. Governments will need to compensate for this by providing social goods
and merit goods via budget (UK Essays, 2018).
Peacock and Wiseman (1961) examined the public expenditure of the United
Kingdom from 1890 to 1995 and formulated a hypothesis on the growth of public
expenditure. They say that public expenditure does not follow a continuous or linear
trend but rather increases in steps or jolts. To support their hypothesis, they provided
three distinct concepts: the displacement eect, the inspection eect and the concen-
tration eect. The research papers studied for the preparation of this study suggest that
increased GE leads to an increase in production but impacts the ination level as well.
The papers emphasise that the reasons and causes of ination have been well studied
by economists, but the relationship of ination with GE has been debatable and the
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