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The IUP Journal of Applied Economics
Capital Outlay and Economic Growth in Indian States: An Empirical Study
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Developmental expenditures, in the form of capital outlay, by the fiscal authorities are the key for the sustained economic growth of any nation or state. Most of the Indian states are witnessing an increasing trend in their capital outlay in general and with respect to economic and social infrastructure in particular to sustain a continuous growth momentum. Most of the previous literatures have proven that there is a high correlation between capital outlay and economic growth. Keeping in view the recent development relating to the changing dynamics of the capital expenditure, the present paper tries to empirically analyze the direction and degree of relationship between capital outlay and economic growth across the states of India. For empirical estimation, the study has used the panel econometrics framework. The findings suggest that there is a significant definite relationship between capital outlay and economic growth in general. Further, at disaggregated level, the results suggest that both the social and economic expenditure has greater contribution in sustaining a high level of economic growth in the case of Indian states, as has been suggested by the Keynesian approach. The outcome also supports the view that there is a greater role of fiscal authority in maintaining a sustainable and inclusive growth process in the states.

 
 
 

Sustained economic growth in an emerging economy like India is essential to reduce the socioeconomic disparities among large sections of the population, especially those who are not included in the mainstream. Now the state is framing such economic policies that exhibit higher rate of inclusive growth. For raising growth, investment has to be revived, particularly the developmental expenditure (both social and economic in nature). It may take some time for revival of private investment. Therefore, one has to concentrate on public investment in terms of capital expenditure. Public investment in infrastructure, social overhead capital, and other areas is crucial as a countercyclical measure to revive the economy. This can also raise private investment. Before 19th century, the widespread laissez-faire philosophy squeezed the hands of government, but failure of this belief during the Great Depression made this philosophy to change its root. After the demonstration of the Keynesian view that the government expenditure positively influences economic growth, government expenditure showed an upward trend. There are certain projects and programs which are better left to the government to finance, because if it is left in the hands of private sector, financing of such projects and programs would be done haphazardly or lead to destruction of resources. Further, it is quite established that the government expenditure on the ones that are developmental in nature could reduce the level of inequalities by strengthening the basic requirements of the mass.

 
 
 

Capital Outlay, Economic Growth in Indian States, An Empirical Study