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Output and the Composition of Government Spending in India

By Ashni Parekh

This paper uses a Cobb-Douglas production function to analyze the role of government spending in the Indian economy and tries to determine how different categories of spending affect growth outcomes. Government spending is hypothesized to influence output and growth through two channels, by affecting the level of TFP and the level of output, and by influencing the growth rate of TFP. The model assumes that TFP is a function of levels of government spending and time. Using annual aggregate data for India from 1961-2002, it is found that government spending depresses per capita GDP. Increasing health and agriculture spending leads to a decrease in output, while increasing infrastructure and education spending improves output. The estimates using data from industries were similar and the growth effect of government spending was found to be negative.

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Advisor: Kent Kimbrough

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