Re-visiting the Armey Curve Hypothesis: An Empirical Evidence from India

Abstract

The present study aims to examine the relationship between government size and economic growth in India for the period from 1961 to 2018. Additionally, as a novel contribution, the current study also attempts to examine the existence of Armey curve and estimate the threshold level of government size in India. The empirical estimation uses time series analysis and employs quadratic ordinary least squares (OLS) function and autoregressive distributed lag (ARDL) bound testing approach to co-integration to examine the association between the variables. The result of the study confirms a long-run significant positive impact of government size on economic growth. The present study also finds the existence of Armey curve and supports the Armey curve hypothesis in India. There exists a positive impact of government size till the threshold level, and beyond the threshold level, the coefficient of economic growth tends to decrease. The estimated optimal government size is 11.89% for India; this shows that, currently, the government spends less than the optimum amount. It implies that India operates somewhere on the positive slope of the Armey curve, and there is a scope for the government to expand its size further. However, the findings of the study also suggest that a large size of the government can be harmful for the efficiency of economic growth; thus, adjusting the government at its optimum is crucial to the economy. JEL Classifications: B23, C01, C87, H11, H50, O47