This article examines the threshold effects of government size (measured as a percentage share of government final consumption expenditure in GDP) on economic growth from a non-linear perspective. We apply a smooth transition autoregression (STAR) model to estimate the threshold level of government size and its impact on economic growth in India for the period spanning from 1971 to 2019. The empirical results reveal that the relationship between government size and economic growth is non-linear. The study finds a statistically significant positive relationship between the size of the government and economic growth below the estimated threshold level of government size of 10.45 per cent. Above the 10.45 per cent threshold level, government size has a deleterious impact on economic growth. The results also reveal that the transition from one extreme economic phase to another is gradual. The findings of our study recommend that policymakers can enhance India’s economic growth by restricting government size to the estimated threshold level or by reducing the size of the government when it lies well above the threshold level.
AkramV., & RathB. N. (2020). Optimum government size and economic growth in case of Indian states: Evidence from panel threshold model. Economic Modelling, 88, 151–162.
2.
AlshahraniM. S. A., & AlsadiqM. A. J. (2014). Economic growth and government spending in Saudi Arabia: An empirical investigation. International Monetary Fund.
3.
AltuncO. F., & AydınC. (2013). The relationship between optimal size of government and economic growth: Empirical evidence from Turkey, Romania and Bulgaria. Procedia Social and Behavioral Sciences, 92, 66–75.
4.
AnamanK. A. (2004). Determinants of economic growth in Brunei Darussalam. Journal of Asian Economics, 15(4), 777–796.
5.
AsimakopoulosS., & KaraviasY. (2016). The impact of government size on economic growth: A threshold analysis. Economics Letters, 139, 65–68.
6.
AttariM. I. J., & JavedA. Y. (2013). Inflation, economic growth and government expenditure of Pakistan: 1980–2010. Procedia Economics and Finance, 5, 58–67.
7.
BarroR. J. (1990). Government spending in a simple model of endogeneous growth. Journal of Political Economy, 98(5, Part 2), S103–S125.
8.
BarroR. J. (1991). Economic growth in a cross section of countries. Quarterly Journal of Economics, 106(2), 407–443.
9.
CameronD. R. (1982). On the limits of the public economy. Annals of the American Academy of Political and Social Science, 459(1), 46–62.
10.
ChandraR. (2004). Government size and economic growth: An investigation of causality in India. Indian Economic Review, 39(2), 295–314.
11.
ChenS. T., & LeeC. C. (2005). Government size and economic growth in Taiwan: A threshold regression approach. Journal of Policy Modeling, 27(9), 1051–1066.
12.
Chiou-WeiS. Z., ZhuZ., & KuoY. H. (2010). Government size and economic growth: An application of the smooth transition regression model. Applied Economics Letters, 17(14), 1405–1415.
13.
ChoiY. J., & BaekJ. (2017). Does FDI really matter to economic growth in India?Economies, 5(2), 20.
14.
ChristieT. (2014). The effect of government spending on economic growth: Testing the non-linear hypothesis. Bulletin of Economic Research, 66(2), 183–204.
15.
ChurchillS. A., & YewS. L. (2017). Are government transfers harmful to economic growth? A meta-analysis. Economic Modelling, 64, 270–287.
16.
DarA. A., & AmirKhalkhaliS. (2002). Government size, factor accumulation, and economic growth: Evidence from OECD countries. Journal of Policy Modeling, 24(7–8), 679–692.
17.
DaviesA. (2009). Human development and the optimal size of government. Journal of Socio-Economics, 38(2), 326–330.
18.
EasterlyW., & RebeloS. (1993). Fiscal policy and economic growth. Journal of Monetary Economics, 32(3), 417–458.
19.
EscribanoA., & JordáO. (2001). Testing non-linearity: Decision rules for selecting between logistic and exponential STAR models. Spanish Economic Review, 3(3), 193–209.
20.
GhaliK. H. (1999). Government size and economic growth: Evidence from a multivariate cointegration analysis. Applied Economics, 31(8), 975–987.
21.
GhoshS., & GregoriouA. (2008). The composition of government spending and growth: Is current or capital spending better?Oxford Economic Papers, 60(3), 484–516.
22.
GrossmanP. J. (1990). Government and growth: Cross-sectional evidence. Public Choice, 65(3), 217–227.
23.
HajaminiM., & FalahiM. A. (2018). Economic growth and government size in developed European countries: A panel threshold approach. Economic Analysis and Policy, 58, 1–13.
24.
KimD. H., WuY. C., & LinS. C. (2018). Heterogeneity in the effects of government size and governance on economic growth. Economic Modelling, 68, 205–216.
25.
LandauD. (1983). Government expenditure and economic growth: A cross-country study. Southern Economic Journal, 783–792.
26.
LeeJ., & StrazicichM. (2004). Minimum Lagrange multiplier unit root test with one structural break. Manuscript, Department of Economics, Appalachian State University, 33(4), 2483–2492.
27.
LucasR. E.Jr (1988). On the mechanics of economic development. Journal of Monetary Economics, 22(1), 3–42.
MehraraM., SoufianiM. B., & RezaeiS. (2016). The impact of government spending on inflation through the inflationary environment, STR approach. World Scientific News, 37, 153–167.
30.
PevcinP. (2004). Does optimal size of government spending exist?University of Ljubljana, 10(1), 101–135.
31.
RamR. (1986). Government size and economic growth: A new framework and some evidence from cross-section and time-series data. American Economic Review, 76(1), 191–203.
32.
RomerP. M. (1986). Increasing returns and long-run growth. Journal of Political Economy, 94(5), 1002–1037.
33.
SchalteggerC. A., & TorglerB. (2006). Growth effects of public expenditure on the state and local level: Evidence from a sample of rich governments. Applied Economics, 38(10), 1181–1192.
34.
SeshaiahS. V., ReddyT. K., & SarmaI. R. S. (2018). General government expenditure and economic growth in India: 1980–81 to 2015–16. Theoretical Economics Letters, 8(04), 728.
35.
SethyS. K., & SahooH. (2015). Investigating the relationship between population and economic growth: An analytical study of India. Indian Journal of Economics & Business, 14(2).
36.
ShivaranjaniV. (2010). Size and Composition of Government Expenditure in India: Impact on Economic Growth. Unpublished Masters Dissertation, Anna University Chennai.
37.
SimonJ. L. (Ed.). (1990). Population matters: People, resources, environment, and immigration. Transaction Publishers.
38.
SolowR. M. (1956). A contribution to the theory of economic growth. Quarterly Journal of Economics, 70(1), 65–94.
39.
TanninenH. (1999). Income inequality, government expenditures and growth. Applied Economics, 31(9), 1109–1117.
40.
TanziM. V., & ZeeM. H. H. (1996). Fiscal policy and long-run growth. International Monetary Fund.
41.
TeräsvirtaT. (1994). Specification, estimation, and evaluation of smooth transition autoregressive models. Journal of the American Statistical Association, 89(425), 208–218.
42.
TeräsvirtaT., & AndersonH. M. (1992). Characterising non-linearities in business cycles using smooth transition autoregressive models. Journal of Applied Econometrics, 7(S1), S119–S136.
43.
YasinM. (2011). Public spending and economic growth: Empirical investigation of Sub-Saharan Africa. Southwestern Economic Review, 30, 59–68.
