Revisiting the Wagner’s law for Indian States using second generation panel cointegration

Abstract

In this paper, we examine if the Wagner’s law, that indicates a long-run economic relationship between government expenditure and income, holds across 15 non-special category states of India post the 1991 liberalization era. In particular, we study the non-stationarity and cointegration properties between state-level government expenditure and state-level income. Given the presence of cross-sectional dependence in our data, we adopt the second-generation panel unit root and cointegration tests. Using panel estimation methods, our results indicate that the Wagner’s law holds at an all-India level with respect to all categories of government expenditure i.e. aggregate government expenditure, development expenditure and non-development expenditure. States with above-average income mostly exhibit long-run elasticity less than one across all types of government expenditure while states with below-average income level exhibit long-run elasticity greater than one across all categories of government expenditure.