An Implication of Wagner's Law in Relation of Public Expenditure to Gross Domestic Product in Sikkim

Abstract

This paper is based on an empirical analysis of the implication of the Wagner's law of rising public expenditure in case of Sikkim, a state of India. The study used the secondary data both in absolute value and in percentage share. In case of the absolute value (for 10 years 20001-10) the study found that the growth rate of GSDP and expenditure on (agriculture, rural development, energy, transport, science and technology, general services, general economic services and social services) are statistically significant. There is a high correlation between GSDP of Sikkim and IFC, GES and SS. The expenditure on ST, IFC, GES and SS are found to be statistically significant. Secondly, in order to avoid the methodological issues in using time series data the study used the share of intra service sector in the service sector GSDP and service sector GSDP for 27 years (1980–2007). The results suggested that the growth rate was significantly high for transport and communication, banking and insurance but the highest growth rate was registered by the transport and communication sector. Even though negative growth rate was recorded for trade-hotel and restaurant, it was statistically insignificant. The overall growth of GSDP of service sector (1.19 percent per annum) was found to be statistically significant. As far as the impact of growth rate of intra service sector on the service sector GSDP is concerned, transport and communication has 24 percent influence on service sector GSDP, but it has been observed to be highest for the trade-hotels and restaurant (51 percent per annum). It implies that even though the growth rate of trade-hotels and restaurant was negative the value of growth share in GSDP is higher in trade hotels and restaurant than the transport and communication. Since Sikkim economy is locationally favorable for tourism, the development of trade and hotels through Government expenditure will be economically an optimal strategy for the development of the economy. The political initiative to boost these sectors will earn maximum revenue to the state GSDP. Similarly the expenditure on Science and technology, GES and IFC also have significant impact on the growth of public expenditure and hence the growth of GSDP of Sikkim. The study therefore, concludes that the Wagner's law of rising expenditure is empirically tested positive for the Sikkim economy and the consequences of rising public expenditure on GSDP were also found to be significant. This also indirectly proves the Keynesian view of economic development through Government expenditure on various state activities