Demystifying the Sensitivity of Economic Growth to Government and Private Consumption Expenditures: An Empirical Study of India

Abstract

Economic theorists and policy makers are divided over the role of private consumption spending and final government consumption spending in economic growth. The present paper is an attempt in resolving the underlying subject with specific emphasis on India. The major objective is to examine degree of sensitivity of economic growth to the changes in private consumption spending and government consumption spending. The study employs econometric techniques of estimating multiple linear regression model, variance decomposition and impulse response function for the secondary data of the post reform period. Results show that private consumption spending has positive and significant impact on economic growth of India. It has been found that a unit change in the GDP growth rate of Indian economy is caused mainly by the variances in private consumption spending and government spending appears to cause minimum variances in economic growth. Further, a unit increase administered to private consumption spending results in rise in future GDP growth rate by multiple times. Whereas, a given increase in government spending reduces future the economic growth throughout the time horizon. This leads to the conclusion that private consumption spending is the key to economic growth of India and higher government consumption spending is detrimental to growth. The policy makers may device more effective policies to create environment for increased private consumption and the government may leverage on investment spending for higher multiplier effect.

Keywords: economic growth, private consumption spending, government consumption spending, consumption expenditure