An Empirical Investigation of Wagner's Law for Twelve Indian States: A Pooled Mean Group Approach Using Linear and Non-Linear Specifications

Abstract

Abstract Wagner's Law, which is considered the first model of public spending in public finance history, suggests that there is a tendency for government spending to increase relative to national income over the long run. This study aims to empirically test the validity of Wagner's hypothesis for twelve Indian states grouped into high-debt and low-debt states, from 2002 to 2020 using a pooled mean group approach. The study also examines the short-run causality between government expenditure and per capita GDP using the Dumitrescu Hurlin Granger causality test. We found a long run relationship between state expenditure and per capita gross state domestic product. Furthermore, there appears to be a significant asymmetric effect of per capita GDP on the expenditure variables, for the entire sample. The study offers value to policy-makers in understanding expenditure dynamics of Indian states and the validity of Wagner’s law in low and high debt states.