GOVERNMENT SPENDING WITH PUBLIC DEBT, ECONOMIC GROWTH AND FISCAL BALANCE: EVIDENCES FROM INDIA

Abstract

This paper has examined the impact of public expenditure on economic growth and viability of fiscal policy when the public expenditure is financed by public borrowing. The ratio of gross fiscal deficit to net national product and the ratio of gross fiscal deficit to total expenditure have been considered as indicators of solvency in fiscal balance. The study is based on theoretical framework and results of econometric analyses. The basic argument of this paper is that if public expenditure is financed by government borrowing, but expenditure fails to generate sufficient growth in income, it will be difficult to repay the loan and fiscal balance will deteriorate. As a result, the viability of the fiscal policy will be under question. The data in the Indian context show that revenue expenditure has increased significantly over time. Since revenue expenditure includes many non-developmental and less productive components, it may not be helpful for economic growth. The results of time series analysis show that the ratio of gross fiscal deficit to net national product (NNP) has increased with increase in total expenditure of the government indicating non-sustainability of fiscal balance. The study also shows that private capital has significant positive impact on NNP but the effect of fiscal deficit on economic growth is not clear.