Fiscal Deficit, Government Expenditure and Economic Growth in India: A Comparative Analysis using ARDL and NARDL Approach

Abstract

The relationship between fiscal deficit and economic growth is a critical issue in macroeconomic policy, particularly in developing economies like India, where fiscal interventions play a significant role in economic stabilization. While fiscal deficits may support growth through demand stimulation, their long-term effects depend on the composition of expenditure.

This study examines the impact of fiscal deficit on economic growth in India by incorporating developmental and non-developmental expenditure within a unified framework. The analysis is based on annual data from 1980–81 to 2021–22. To capture both linear and nonlinear dynamics, the study employs the Autoregressive Distributed Lag (ARDL) and Nonlinear ARDL (NARDL) models.

The results from the ARDL model confirm a long-run relationship among the variables; however, the impact of fiscal deficit on economic growth is statistically insignificant under the linear specification. In contrast, the NARDL model reveals significant asymmetric effects, indicating that the impact of fiscal deficit varies depending on its direction. Fiscal expansion negatively affects growth, while fiscal consolidation exerts a stronger contractionary impact.