On the Impacts of Government Size on Economic Growth in India: Some Evidence from Smooth Transition Autoregression Model

Abstract

This article examines the threshold effects of government size (measured as a percentage share of government final consumption expenditure in GDP) on economic growth from a non-linear perspective. We apply a smooth transition autoregression (STAR) model to estimate the threshold level of government size and its impact on economic growth in India for the period spanning from 1971 to 2019. The empirical results reveal that the relationship between government size and economic growth is non-linear. The study finds a statistically significant positive relationship between the size of the government and economic growth below the estimated threshold level of government size of 10.45 per cent. Above the 10.45 per cent threshold level, government size has a deleterious impact on economic growth. The results also reveal that the transition from one extreme economic phase to another is gradual. The findings of our study recommend that policymakers can enhance India’s economic growth by restricting government size to the estimated threshold level or by reducing the size of the government when it lies well above the threshold level. JEL Codes: JEL H00, JEL E6, JEL E62