Assessing Keynesian and Wagnerian Hypotheses in India : Insights from a VAR Model
Authors
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Dhyani Mehta
Assistant Professor of Economics, Department of Economics, School of Liberal Studies, Pandit Deendayal Energy University, Knowledge Corridor, Raisan Village, PDPU Rd, Gandhinagar - 382 007, Gujarat
https://orcid.org/0000-0002-6783-0506
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Priyanshu Chavda
Doctoral Scholar, Department of Economics, School of Liberal Studies, Pandit Deendayal Energy University, Knowledge Corridor, Raisan Village, PDPU Rd, Gandhinagar - 382 007, Gujarat
https://orcid.org/0009-0000-0858-2322
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Mandar Bhatt
Doctoral Scholar (Corresponding Author), Department of Economics, School of Liberal Studies, Pandit Deendayal Energy University, Knowledge Corridor, Raisan Village, PDPU Road, Gandhinagar - 382 007, Gujarat
https://orcid.org/0009-0005-0132-1812
DOI:
https://doi.org/10.17010/aijer/2026/v15i1/174432Keywords:
GDP, Keynesian, Wagner’s hypothesis, FRBM, LPG reforms, VAR, India.JEL Classification Codes :C32, E62, H50, O40
Publication Chronology: Paper Submission Date : June 25, 2025 ; Paper sent back for Revision : November 29, 2025 ; Paper Acceptance Date : January 20, 2026
Abstract
Purpose : This study investigated the interrelationships between developmental expenditure (DE), non-developmental expenditure (NDE), and GDP in India. Motivated by ongoing debates on fiscal discipline and growth-oriented spending, the analysis aimed to understand how these key fiscal components interacted within India's evolving macroeconomic framework.
Methodology : A vector autoregression (VAR) model was employed to capture the dynamic and bidirectional relationships among the variables. The 1991 LPG reforms and the 2003 FRBM Act were introduced as exogenous variables to account for structural breaks in fiscal behavior. This modeling approach allowed for a comprehensive assessment of how shocks to one variable propagated through the system over time.
Findings : The results indicated that DE positively influenced GDP, supporting the Keynesian proposition that productive public spending stimulated economic growth. Conversely, rising GDP led to higher NDE, consistent with Wagner's Law. The study highlighted an important causal chain: DE propelled GDP growth, which subsequently increased NDE.
Practical Implications : The findings underscored the need for policymakers to balance growth-enhancing developmental spending with fiscal pressures imposed by rising non-developmental commitments. These dynamics informed the design of expenditure strategies that sustained growth while maintaining fiscal prudence within India's rules-based fiscal framework.
Originality : The study's novelty lay in disaggregating public expenditure into developmental and non-developmental components and analyzing their distinct impacts on economic growth. The incorporation of two major structural reforms — the 1991 LPG reforms and the 2003 FRBM Act — as exogenous dummy variables provided a refined understanding of how expenditure patterns evolved in response to institutional changes.
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References
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