Wagner hypothesis in India: An empirical investigation from pre and post reform period

• Published date: 01 February 2022
• Author: Ritu Rani,Naresh Kumar
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2395

ACADEMIC PAPER

Wagner hypothesis in India: An empirical investigation from

pre and post reform period

Ritu Rani

1

| Naresh Kumar

2

1

Department of Commerce, Government

College for Women Sampla, Rohtak, India

2

Institute of Management Studies and

Research, Maharshi Dayanand University,

Rohtak, India

Correspondence

Naresh Kumar, Institute of Management

Studies and Research, Maharshi Dayanand

University, Rohtak, Haryana, India.

Email: nkimsar@gmail.com

The present study empirically examines the validity of Wagner's hypothesis for

Indian economy in pre (1967–1990) and post (1991–2015) reform period. The study

examined six alternatives versions of Wagner's hypothesis. The long-run relationship

between government expenditure and economic growth is tested using ARDL model

while causal relationship has been investigated using Granger causality test. The

results found strong evidence of Wagner's hypothesis during post reform period

while the elasticity of government expenditure to economic growth is low in pre

reform period. Further, results indicate that unidirectional causality is moving from

economic growth to government expenditure in all versions of Wagner's hypothesis.

JEL CLASSIFICATION

C22; E62; H50; H54; O40

1|INTRODUCTION

As the real output of the nation increases over a period of time, the

share of government expenditure relative to national income

increases. This particular behavior of government expenditure has

been popularly known as Wagner's law, coined by Adolf Wagner in

1883. Wagner's law of increasing state-level activities has captured

wide attention among researchers and economist during the last three

decades. Wagner's hypothesis focuses on the nexus between eco-

nomic growth and the size of government expenditure and postulates

that the latter grows at a faster rate than the former over the period

of time to meet the rapid demand of industrialization and develop-

ment in the economy. Wagner's hypothesis has attracted wide atten-

tion in public finance literature (Goffman, 1968; Gupta, 1967;

Mann, 1980; Musgrave, 1969; Peacock & Wiseman, 1979;

Pryor, 1968). Numerous studies have been conducted thereafter to

check the validity of Wagner's hypothesis in different countries. Many

of them supported the Wagner's law (Akitoby, Clements, Gupta, &

Inchauste, 2006; Antonis, Constantinos, & Persefoni, 2013; Atasoy &

Gür, 2016; Chang, Liu, & Caudill, 2004; Keho, 2016; Mohammadi,

Cak, & Cak, 2008; Narayan, Nielsen, & Smyth, 2008; Narayan, Rath, &

Narayan, 2012; Oxley, 1994; Tsaurai & Odhiambo, 2013; Wagner &

Weber, 1977), while many have reported results contrary to the

Wagner's law (Magazzino, Giolli, & Mele, 2015; Moore, 2016) .

A striking feature of Indian economy over last five decades is the

increase in the size of government sector and admirable growth of

national income. Government expenditure as the percentage of GDP

was around 18% in the 1970s; 22% in the 1980s; 23.82% in the

1990s, while the average growth rate of the economy (measured by

GDP annual growth rate) was 3.08% in the 1970s, 5.56% in the 1980s

and 5.59% in the 1990s. However, it appears a drastic change in

Indian economy after economic reforms of 1991. The size of the gov-

ernment expenditure increased to 34.12% in the 2000s and further

rise to 35.79 over the period of 2010–2015. On the other hand, aver-

age growth rate increased to 7.41% in 2000s and 6.74% in 2010s.

The sharp rise in the government sector has important implication

with respect to allocation and distribution of resources between pri-

vate and public players. Thus, it appears from the above fact that as

the size of economy expands, the role of public sector also increased

to meet the demand of industrialization and urbanization. Private sec-

tor is unwilling to invest in key areas such as energy, infrastructure, trans-

portation, and safety of community, therefore, government investment

plays a key role to stimulate economy. However, it is reflected in Table 1

that fiscal deficit as the percentage GDP has not expanded to such an

extent. Industrialization and urbanization expands the government reve-

nue from taxes particularly by means of income tax and corporate tax.

Consequently, these altogether helped in reducing the fiscal deficit over

the period of development (Figure 1).

Received: 12 May 2020 Revised: 29 May 2020 Accepted: 14 August 2020

DOI: 10.1002/pa.2395

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https://doi.org/10.1002/pa.2395