Abstract:
The present study endeavors to examine the validity of Wagner’s Law in India over
the period 1950/51 to 2007/08. Six versions of Wagner’s hypothesis given by
different economists have been estimated which support the existence of long-run
relationship between economic growth and growth of public expenditure. Two
structural breaks have also been given to test the impact of structural changes in
Indian economy on the growth of public expenditure. It has been found that the first
structural break given for mild-liberalization period causes insignificant changes in
the growth elasticity of public expenditure. However, the observed change in the
elasticity due to the second phase of intensive liberalization is statistically
significant. Nevertheless, the Wagner’s law is still supported during the intensive
phase of liberalization given a significant fall in the elasticity. Empirical evidences
regarding the short-run dynamics refute the existence of any relationship between
the economic growth and the size of the government expenditure