Is Fiscal Deficit Essential for Stimulating Economic Growth in Developing Economies? Theory and Empirical Evidence from India

Published On: 2021-09-16 11:28:07

Price: ₹ 500

Author: Devender and Jagdeep Kumar

Author Address: Assistant Professor, Department of Economics, Government College for Girls, Pillukhera, Jind (Haryana) and Assistant Professor, Department of Economics, Maharshi Dayanand University, Rohtak (Haryana)

Keywords: Causality, economic growth, fiscal deficit, VECM

JEL Codes: C32, C50, H62, O40


The primary purpose of this paper was to assess the impact of fiscal deficit on the economic growth of the Indian economy and find out the causality between fiscal deficit and economic growth from 1981-82 to 2019-20. To analyse the long-run relationship between the variables Johansen Co-integration test was used; after verifying the existence of long-run relationship among variables, the Vector Error Correction Model (VECM) was used, and the Granger Causality test was also used for investigating the direction of causality between pair of variables. The findings of the study supported the ideology of classical economists in which they neglected the government intervention for the growth and development of an economy. The results showed that in long run, fiscal deficit had a significant negative impact on economic growth as one percent increase in fiscal deficit demoted the GDP growth rate by 0.075 percent, whereas in the short run, the impact was also found negative, but it was significant only one lag. Simultaneously, there was unidirectional causality found from fiscal deficit to GDP growth.


Indian Journal of Economics and Development
Volume 17 No. 3, 2021, 598-607

Indexed in Clarivate Analytics (ESCI) of WoS
Scopus: Title Accepted
NAAS Score: 5.15