Analyzing the fiscal performance of the Rajasthan state and

evaluating the Wagner's law for the state

Department of Economics and Finance

ECON F341: Public Finance Theory and Policy
Prof. Balakrushna Padhi

Group No.2

Group Members:
Rakshit Sharma (2021B3A71113P)
Sanskar Singhal (2021B3AB0807P)
Priyanshu Bhatnagar (2021B3A71140P)
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Acknowledgement

The success of this report would not have been possible without the assistance and guidance of
our teachers. We would like to thank the Vice-Chancellor (BITS Pilani University), Prof. V.
Ramgopal Rao, the Director of BITS Pilani (Pilani Campus), Prof. SK Barai, and the Instructor
In- charge(IC) for Public Finance Theory and Policy (ECON F341 course), Dr. Balakrushna
Padhi sir, for giving us this opportunity. We want to express our sincere gratitude to our
esteemed professor for his invaluable guidance throughout this report’s preparation. Finally, I
would like to acknowledge my family and friends for their unwavering support and
encouragement throughout this internship. Their belief in my abilities and constant motivation
kept me inspired and focused on achieving my goals.
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Table of contents

1. List of Tables and Figures………………………………………………………3

2. Abbreviations Page……………………………………………………………..4
3. Abstract………………………………………………………………………….5
4. Introduction…………………………………………………………………….6
5. Historical significance………………………………………………………….7
6. Rajasthan Through Wagner’s Lens…………………………………………..9
7. Literature Review-Fiscal Policy……………………………………………..12
8. Methodology………………………………………………………………….15
9. Qualitative Analysis of Wagner's Law……………………………………..17
10. Quantitative Analysis of Wagner’s Law………………………………….20
11. Conclusion………………………………………………………………….30
12. References…………………………………………………………………32
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List of Tables

● Table 1 and 2 Representing results of Johansen Maximum Likelihood (ML)

Vector Autoregressive (VAR) Method
● Table 3 and 4 Representing results of Vector Error Correction Model
 4

Abbreviation Page

● GDP - Gross Domestic Product

● GSDP - Gross State Domestic Product
● GST - Goods and Services Tax
● ADF - Augmented Dickey-Fuller (test)
● PP Test - Phillips-Perron Test
● VECM - Vector Error Correction Model
● PMG-ARDL - Pooled Mean Group-Autoregressive Distributed Lag
● VAT - Value Added Tax
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Abstract

This document presents a thorough analysis of the fiscal performance of the state of Rajasthan,
focusing specifically on evaluating the applicability of Wagner's Law in the state's economic
context. The study takes a multifaceted approach, combining quantitative data and qualitative
insights to provide a nuanced understanding of the fiscal dynamics at play.

To begin, the report provides a historical overview of Rajasthan's economic development,

highlighting important milestones and policy interventions that have shaped its fiscal landscape.
A detailed examination of revenue and expenditure patterns over a specific period sheds light on
the state's fiscal discipline, revenue diversification, and expenditure priorities.

Additionally, the study explores the relevance of Wagner's Law, which suggests a positive
relationship between economic development and government expenditure. Empirical evidence is
carefully analyzed to determine the extent to which the state's fiscal policies align with the
predictions of Wagner's Law. The analysis also takes into account potential factors that may
influence the observed patterns, such as demographic shifts, economic structure, and public
expectations.

By adopting a comparative perspective, the report draws comparisons between Rajasthan's fiscal
performance and that of other Indian states, providing insights into regional variations and the
unique challenges faced by Rajasthan. These findings contribute to the broader discussion on the
effectiveness of fiscal policies and offer valuable recommendations to policymakers for
optimizing economic development through prudent fiscal management.

In conclusion, this report offers a comprehensive examination of Rajasthan's fiscal performance

and evaluates the validity of Wagner's Law within the state's specific context. The insights
derived from this analysis deepen our understanding of the economic dynamics in Rajasthan and
serve as a basis for well-informed policy decisions aimed at promoting sustainable economic
growth.
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Introduction

The fiscal policies and management of a region play a crucial role in shaping its economic
trajectory. This report focuses on the northwestern state of India, Rajasthan, and delves into the
realm of fiscal analysis. Rajasthan, known for its rich history and vibrant culture, has
experienced significant economic transformations in recent decades. To understand its
development better, it is essential to examine its fiscal performance and evaluate the relevance of
economic theories, such as Wagner's Law, in shaping its fiscal landscape.

Rajasthan's economic journey is a blend of tradition and modernity, with various sectors
contributing to its growth. From agriculture to tourism, the state's economic mosaic reflects the
challenges and opportunities that define its fiscal dynamics. This report aims to unravel the
intricacies of Rajasthan's fiscal policies by analyzing its revenue generation, expenditure
patterns, and economic development indicators.

One of the central focuses of this investigation is the evaluation of Wagner's Law within the
context of Rajasthan's fiscal practices. Named after the German economist Adolph Wagner, this
law suggests a positive correlation between economic growth and government expenditure.
Through this exploration, we seek to determine the extent to which Wagner's Law aligns with the
fiscal realities of Rajasthan and identify the factors that may influence this relationship.

By combining empirical data, historical context, and economic theory, this report aims to provide
valuable insights into Rajasthan's fiscal performance. As we delve into the subsequent sections, a
deeper understanding of the state's economic nuances and the implications of fiscal decisions on
its development trajectory will emerge. This investigation not only contributes to the academic
discourse on fiscal analysis but also holds practical implications.
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5.Historical significance

5.1. Context of Emergence

Adolph Wagner was a prominent figure in the German Historical School, which emphasized the
role of historical context and institutions in economic analysis. Wagner's Law emerged during a
period of significant social and economic transformation in Germany and other industrializing
nations, marked by rapid urbanization, industrialization, and the expanding needs of an
increasingly complex society. This context influenced Wagner's observation that the
government's role in the economy tends to increase with economic development.

5.2. Theoretical Contributions

Wagner's Law challenged the classical liberal economic thought prevailing at the time, which
advocated for a limited role of the state in economic affairs. By asserting that economic
development is accompanied by an expanding role for the public sector, Wagner contributed a
new dimension to the debate on the size and functions of government. His work laid the
groundwork for later theories on public finance and welfare economics, emphasizing the state's
role in providing public goods and services, redistributing income, and regulating economic
activity.

5.3. Empirical Observations

Wagner based his law on empirical observations of European economies, noting that as nations
become wealthier, their governments tend to take on more responsibilities, including education,
healthcare, social welfare, and infrastructure development. This observation was revolutionary at
the time, as it provided a systematic way to understand and anticipate changes in government
spending patterns with economic growth.

5.4. Influence on Fiscal Policy and Public Administration

Wagner's Law has had a lasting impact on fiscal policy and the administration of public services.
It has informed the rationale behind progressive taxation systems, social insurance programs, and
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state intervention in economic development. By highlighting the relationship between economic

growth and government expenditure, Wagner's insights have guided policymakers in structuring
budgets and planning for future public spending needs.

5.5. Foundation for Further Research

The law has spurred extensive empirical research and theoretical debates throughout the 20th and
into the 21st century. Economists have tested its validity across different countries, time periods,
and stages of economic development. This research has not only examined the law's applicability
but also refined our understanding of the factors influencing government spending, including
demographic changes, technological advances, and political institutions.

5.6. Critiques and Evolving Interpretations

Wagner's Law has faced criticism and skepticism, especially from advocates of market efficiency
and limited government. Critics argue that increased government spending does not necessarily
lead to better economic outcomes and may crowd out private sector activity. These critiques
have led to a more nuanced interpretation of Wagner's Law, recognizing that the relationship
between economic growth and government size is influenced by a variety of factors and does not
imply a causal mechanism.

5.7. Legacy and Continuing Relevance

Despite debates over its empirical validity and implications, Wagner's Law remains a
foundational concept in public economics and fiscal sociology. It continues to influence
contemporary discussions on the role of government in modern economies, especially in the
context of globalization, environmental challenges, and social inequality. The law prompts
ongoing inquiry into how best to balance economic growth with the provision of public goods
and services, making it a subject of enduring significance in economic research and policy
formulation.
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6.Rajasthan Through Wagner's Lens:Why To study Wagner’s Law for

Rajasthan

Studying Wagner's Law in the context of Rajasthan, one of India's largest and most economically
diverse states, holds significant importance for several reasons. This examination not only sheds
light on the patterns of public expenditure and economic growth within the state but also
provides insights into the broader implications of such dynamics for fiscal policy, development
strategy, and public welfare. Here are detailed reasons why studying Wagner's Law is
particularly relevant to Rajasthan:

6.1. Fiscal Policy and Development Planning

Understanding the relationship between economic growth and public sector expansion, as
suggested by Wagner's Law, is crucial for Rajasthan's fiscal policy and development planning.
As the state continues to grow economically, forecasting the need for increased public spending
becomes essential. This understanding can help the Rajasthan government craft sustainable fiscal
policies, including taxation, public investments, and managing public debts efficiently, ensuring
that the state's economic growth is complemented by adequate social and infrastructure
development.

6.2. Addressing Infrastructure Needs

Rajasthan's vast geographical area and significant rural population present unique challenges in
infrastructure development, including transportation, water supply, and energy. Wagner's Law
implies that as the state's economy grows, there will be increased demand and justification for
public investment in these critical areas. Studying this law helps anticipate the required
expansion of government spending in infrastructure to support economic activities and improve
living standards across the state.
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6.3. Social Services Expansion

As the economy of Rajasthan expands, there is an anticipated increase in demand for public
services, including healthcare, education, and social welfare. Wagner's Law provides a
framework for understanding and planning for this increased demand, guiding policymakers in
allocating resources efficiently to meet the population's evolving needs. This is particularly
relevant for Rajasthan, where improving access to quality education and healthcare remains a
priority for sustainable development.

6.4. Economic Diversification and Government Role

Rajasthan's economy is diversifying beyond traditional sectors like agriculture into tourism,
manufacturing, and services. According to Wagner's Law, such economic development and
diversification necessitate a larger governmental role in regulating new industries, protecting the
environment, and ensuring labor welfare. Studying Wagner's Law can offer insights into how the
government can effectively support and regulate these emerging sectors, promoting sustainable
growth and development.

6.5. Comparative Analysis with Other States

Analyzing Wagner's Law in Rajasthan allows for comparative studies with other Indian states,
offering valuable lessons on managing economic growth and public sector expansion. Such
comparisons can help identify best practices in fiscal management, public service delivery, and
development strategies that could be adapted to Rajasthan's context, taking into consideration its
unique demographic, geographic, and economic characteristics.

6.6. Efficient Public Spending and Accountability

Wagner's Law underscores the importance of efficient public spending to match the growth in
government size. For Rajasthan, this emphasizes the need for transparency, accountability, and
effectiveness in public expenditures to ensure that the increased government spending translates
 11

into tangible benefits for the population, such as improved public services, better infrastructure,
and higher living standards.

6.7. Policy Implications for Sustainable Development

For a developing economy like Rajasthan, understanding the implications of Wagner's Law is
crucial for balancing economic growth with sustainable public sector expansion. It highlights the
need for prudent fiscal policies that support development objectives without leading to
unsustainable debt or inefficiencies in public spending, ensuring that growth is inclusive and
benefits all sections of the society.

6.8 Conclusion

In the context of Rajasthan, studying Wagner's Law is integral for understanding the dynamics
between economic development and the role of government in facilitating this growth through
public spending. It provides a theoretical basis for planning and managing the state's fiscal
policies, infrastructure development, social services expansion, and overall development
strategy, ensuring that economic growth leads to improved welfare and quality of life for the
residents of Rajasthan.
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7 Literature Review

7.1 Fiscal Policy and its Significance:

Fiscal policy refers to the use of government revenue and expenditure to influence the economy.
In the context of a state like Rajasthan, the fiscal policy is typically formulated and implemented
by the state government.

Key components of fiscal policy include:

● Government Revenue: This includes taxes and non-tax revenues. The state government
of Rajasthan raises revenue through various taxes such as sales tax, stamp duty, excise
duty, and other fees and charges.
● Government Expenditure: The state government allocates funds for various sectors and
programs, such as education, healthcare, infrastructure, social welfare, and economic
development.
● Budgetary Policies: The annual budget is a crucial instrument for implementing fiscal
policy. The state budget outlines the revenue and expenditure estimates for the fiscal
year, providing a roadmap for the government's financial activities.
● Deficit Management: Fiscal deficit, which occurs when government expenditure
exceeds revenue, is a significant consideration. Managing deficits effectively is crucial to
maintaining fiscal discipline.
● Economic Development: Fiscal policies are often designed to promote economic
growth, create employment opportunities, and improve the overall economic well-being
of the state's residents.
● Public Debt Management: States may borrow to meet their expenditure requirements.
Managing public debt is important to ensure financial stability and avoid debt-related
issues.
● Tax Policies: The state government may use tax policies to promote investment,
stimulate economic activity, or address specific economic challenges.
● Social Welfare Programs: Fiscal policy often includes provisions for social welfare
programs aimed at poverty alleviation, health care, and education.
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7.2 Wagner's Law and its Applications: A Detailed Analysis

Wagner's Law, formulated by German economist Adolph Wagner in the 19th century, suggests a
positive relationship between the level of economic development in a country and the size of its
public sector. Specifically, it posits that as a nation's income, or GDP, increases over time, there
is a tendency for government spending to grow at a faster rate than the economy itself. This
implies that the public sector's share of GDP expands as a country becomes wealthier.

Key Propositions of Wagner's Law:

● Income Elasticity of Demand for Public Goods:Wagner argued that certain public
goods and services, such as education, healthcare, and infrastructure, exhibit a higher
income elasticity of demand. As income rises, the demand for these services tends to
grow disproportionately.
● Social and Economic Complexities:Advanced economies are characterized by increased
social and economic complexities, leading to a higher demand for public services.
Government intervention becomes essential in providing and managing these services
efficiently.
● Welfare State Expansion:Wagner's Law is often associated with the concept of a
welfare state. As nations progress economically, there is an increasing need for social
safety nets, unemployment benefits, and other welfare programs, necessitating a larger
role for the government.
● Technological Advancements:Technological advancements and innovation often
require substantial public investment. Governments may need to allocate resources to
research and development, infrastructure, and technology-related initiatives to support
economic growth.

Applications and Criticisms:

● Empirical Evidence:Numerous studies have been conducted to assess the validity of

Wagner's Law across different countries and time periods. While some evidence supports
the positive correlation between economic development and government spending, there
are exceptions and variations.
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● Criticisms:Wagner's Law has faced criticism for its deterministic nature. Critics argue
that not all countries follow the same trajectory, and the relationship between economic
development and government spending can be influenced by various factors, including
political ideologies, institutional frameworks, and policy choices.
● Government Efficiency:The effectiveness of Wagner's Law can depend on the
efficiency of government spending. In some cases, increased government spending may
not necessarily translate into improved public services or economic development if there
are issues with corruption, bureaucracy, or mismanagement.
● Globalization and Privatization:In an era of increasing globalization, some argue that
Wagner's Law might be challenged as countries embrace more market-oriented policies
and privatization. The role of the state may evolve, impacting the traditional relationship
posited by Wagner's Law.

Contemporary Relevance:

● Social Expenditures:Many modern economies allocate a significant portion of their

budgets to social expenditures, aligning with the welfare state principles associated with
Wagner's Law.
● Infrastructure Investment:Governments worldwide continue to invest heavily in
infrastructure projects, supporting economic development and job creation, consistent
with the Wagnerian perspective.
● Crisis Response:During economic downturns or crises, governments often increase
spending to stimulate the economy and provide relief, reflecting the countercyclicall
nature of fiscal policy associated with Wagner's Law.

Wagner's Law has provided valuable insights into the relationship between economic
development and government spending. However, its applicability is not universal, and
variations exist based on country-specific factors. As economies evolve, the role of the state and
the dynamics of public spending may continue to be shaped by a complex interplay of economic,
social, and political factors. Researchers and policymakers must consider these nuances when
analyzing contemporary fiscal policies and their implications.
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8 Methodology

8.1. Research Design:

This study adopts a quantitative and qualitative research design to analyze the fiscal performance
of the Rajasthan state and evaluate the applicability of Wagner's Law. The research involves a
comprehensive review of secondary data sources, emphasizing government publications,
economic surveys, and relevant academic literature.

8.2. Data Collection:

a. Primary Data: As this study relies on secondary data, there is no primary data collection
involved. The focus is on utilizing existing data sources to ensure a thorough and comprehensive
analysis.

b. Secondary Data: Government Publications: Extract data from official documents such as
state budgets, economic surveys, and fiscal policy reports released by the Rajasthan state
government.

8.3. Variables and Indicators:

a. Fiscal Performance Indicators:

● - GDP growth rate

● - Government revenue and expenditure trends
● - Fiscal deficit and debt levels
● - Composition of public spending (social services, infrastructure, etc.)

b. Wagner's Law Indicators:

● - Long-term trends in government spending as a percentage of GDP

● - Analysis of specific sectors that may exhibit higher income elasticity (e.g., education,
healthcare)
● - Comparison of economic development and government spending trajectories over time
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8.4. Macroeconomic and Microeconomic variables in the study of Wagner’s Law:

a. Macroeconomic variables:
● Gross State Domestic Product (GSDP)
● Public Sector Expenditure
● Sectoral Contribution to GSDP
● Population Growth
● Income Per Capita
● Tax Revenue
b. Microeconomic variables:
● Public Spending on Health and Education
● Infrastructure Investment
● Social Welfare Programs
● Public Sector Employment
● Government Debt.
● Efficiency of Public Spending
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9 .Qualitative Analysis of Wagner’s Law

Previous Case Studies:

9.1. Wagner's Law and Public Expenditure in Rajasthan: An Econometric Analysis by K

Kaur, 2019

The study investigates the applicability of Wagner's Law to the Rajasthan economy from 1970-
71 to 2013-14, focusing on six different versions of the law to assess the growth elasticity of
public expenditure. Employing various econometric techniques, including unit root tests (ADF,
PP Test) and cointegration tests (Engle-Granger method and Johansen test), it finds that four
versions (Peacock, Gupta, Guffman, and Pryor) exhibit a long-term relationship with Rajasthan's
net state domestic product, while two versions (Musgrave and Mann) do not. Further analysis
using the Vector Error Correction Model and Standard Pair-wise Granger Causality tests reveals
mixed results: unidirectional causality in the Peacock, Guffman, and Pryor versions (with no
causality for Gupta in the long run) and bidirectional short-run causality for Peacock and
Guffman versions, with no short-run causality found in the Pryor and Gupta versions. The
Musgrave and Mann versions showed no causality. The study concludes that the Peacock and
Guffman versions of Wagner's Law are valid for Rajasthan, indicating a nuanced understanding
of the relationship between public expenditure growth and economic development in the state,
aligning with findings from previous research.

9.2. An Empirical Investigation of Wagner's Law for Twelve Indian States: A Pooled Mean
Group Approach Using Linear and Non-Linear Specifications by P Choudhary, S Chary,
and N Singh, 2023

The study provides a comprehensive analysis of the relationship between public expenditure and
economic growth across twelve Indian states from 2002 to 2021, leveraging the frameworks of
Wagner's law and Keynes' hypothesis. By employing advanced econometric techniques that
accommodate the diversity and complexity of the states' economies, including panel models,
PMG-ARDL tests for long-run and short-run dynamics, and non-linear specifications to capture
asymmetric effects, the research finds strong support for Wagner's law. This suggests that in the
context of these Indian states, public expenditure grows as a function of economic development,
 18

outpacing income growth during the industrialization process. Conversely, the Keynesian
hypothesis, which posits that public expenditure drives economic growth, is not supported by the
data.

9.3. A Decade of Ups and Downs in Public Expenditure on Higher Education by JBG Tilak,
included in the India Higher Education Report 2016

The paper reviews public expenditure on higher education in India during the decade starting
from 2000-01, coinciding with the second decade of structural reforms. Initially, higher
education faced significant budget cuts, but with economic revival and growth, expectations
were high for increased funding. Despite some major shifts in funding trends towards higher
education during the eleventh and twelfth five-year plans, the paper, using secondary official
data, reveals that allocations still fall short of the government's target of 1.5% of GDP and the
sector's needs. It observes a pattern of steep cuts and increases in funding, leading to a decade
characterized by fluctuations in public expenditure on higher education.

The study underscores the necessity for the government to commit to a steady increase in
funding to support the growing needs of the higher education sector, emphasizing the importance
of maintaining adequate, equitable, and excellent funding proportions. It highlights the
uncertainty and instability in the growth of higher education due to the lack of a cohesive policy
statement on state funding. The paper questions whether the Rashtriya Uchchatar Shiksha
Abhiyan, a national higher education mission, meets the criteria for ensuring a stable financial
base for higher education. It concludes that a long-term plan, including financial planning, is
critical for the sustainable development of higher education in India.

9.4. Causality between Government Expenditure and Domestic Output: A Case Study of
Indian States by S Jha and B Nayak, 2022

The study's findings indicate a complex relationship between government expenditure, revenue
and capital receipts, and Net State Domestic Product (NSDP) across major Indian states. While
strong evidence of cointegration suggests a significant link between combined revenue and
capital receipts with NSDP and aggregate expenditure in most states, exceptions like Rajasthan,
Tamil Nadu, and Uttar Pradesh demonstrate varied dynamics where NSDP does not significantly
 19

affect aggregate government expenditure. Further differentiation in the types of government

expenditures reveals that only half of the examined states exhibit a long-run relationship between
certain types of government spending and their NSDP, with six states evidencing Wagner's Law
and two showing bidirectional causality.

The results from Granger Causality tests present a mixed picture, indicating Wagner's Law's
prevalence in aggregate expenditure across 13 states but showing inconclusive results for
disaggregated government expenditure, with only six states somewhat validating Wagner's Law.
The study also highlights irregular causality patterns between types of government expenditures
and NSDP within the same states, suggesting potential discrepancies in long-term planning or
expenditure strategy among state governments.

An important observation from the study is the shifting emphasis from capital to revenue
expenditure in India, underscoring the necessity of balancing these expenditures to support
sustainable economic impact. The study concludes with a call for more detailed research into the
expenditure patterns of Indian states and their economic implications, emphasizing the need for a
holistic approach to government spending that supports comprehensive societal development and
positively influences NSDP over the long term.
 20

10. Quantitative analysis of wagner's law with respect to Rajasthan

The following steps are taken to check the validity of Wagner's law under Rajasthan.

1.Data Collection- Historical data on Rajasthan's GDP and government spending from various
sources, including the Ministry of Finance, Reserve Bank of India, and the official statistics
portal of the Rajasthan state government. The data spans several decades to capture long-term
trends effectively.

2.Calculation of Government Spending Share- Calculated the ratio of government spending to

GDP. This involved dividing the total government expenditure by the GDP for that year and
expressing it as a percentage.

3.Plotting the Data- Created a time series plot with years on the x-axis and the share of
government spending in GDP on the y-axis. This visualization allowed us to observe any trends
or patterns over time.

4.Statistical Analysis- statistical methods, including linear regression, to analyze the

relationship between GDP and government spending in Rajasthan. Through regression analysis,
We determined if there's a statistically significant trend of government spending increasing as a
proportion of GDP over time.

5.Interpretation of Results- Interpreted whether Wagner's Law holds true for Rajasthan. If
government spending consistently increases as a percentage of GDP over the years, it provides
evidence in support of Wagner's Law for the state.

10.1 Trends observed in Rajasthan’s expenditure and fiscal policies

● Projected for 2023-24 at current values, Rajasthan's Gross State Domestic Product
(GSDP) is anticipated to reach Rs 15.7 lakh crore, marking an 11.5% growth from the
previous year. According to the revised estimates of the previous fiscal year, the
expenditure excluding debt repayments in 2023-24 is estimated to be around 2,97,091
crores, a 7.1% increase from the estimated expenditure in the previous fiscal year. In
 21

addition, during this period the government aims to repay a debt amounting to 93 766
billion rupees.
● According to the revised 2022-23 projections, receipts are estimated at 2,34,319 crores
excluding borrowings in 2023, which is an increase of 8.4% from last year. The revenue
deficit is expected to be 1.6% of GSDP in 2023-24, which is lower than the previous
fiscal year, amounting to 24,896 crores. In addition, the fiscal deficit target for the period
from 2023 to 24 is 4.0% of GSDP, which is slightly lower than the revised estimates from
the previous year, amounting to INR 62,772 billion.
● In particular, the GSDP is expected to grow by 8.2% in 2022-23 from the previous year,
taking into account the economy of Rajasthan. Growth has been recorded in sectors such
as agriculture, manufacturing and services with the largest percentage of growth being
10.7%. It is estimated that 60%, 15% and 24% of the economy will be contributed by
agriculture, manufacturing and services.
● The per capita pay of Rajasthan is anticipated to have expanded by 15% in 2022-23
compared to the past year. Add up to consumption for 2023-24 is set at Rs 2,97,091
crore, a 7.1% increment from the changed gauges of the past year. The state plans to
cover this use through receipts ( borrowings) of Rs 2,34,319 crore and net borrowings of
Rs 54,589 crore. Add up to receipts for 2023-24 are expected to rise by 8.4% compared
to the changed gauges of the past monetary year.
● In terms of shortfalls, the income shortage and monetary shortage are anticipated to be
lower in 2023-24 compared to the reexamined gauges of the past year, demonstrating a
somewhat advanced money related position. The central government has allowed states a
monetary shortfall of 3.5% of GSDP within the current financial year, with an extra 0.5%
designated for executing power division changes. Within the past monetary year, in spite
of the fact that there was an increment in both consumption and receipts, the financial
shortage as a rate of GSDP made strides somewhat due to an increment in GSDP figures.

10.2 Annuity burden may increment within the future

A few states counting Rajasthan had declared to pull back from the New pension Scheme (NPS)
and re-implement the Old Pension Scheme (OPS). Given that the current retirees from states are
fundamentally selected within the OPS, quick monetary strain will not be felt due to moving
 22

back to OPS. In truth, Rajasthan has decreased its assignment to NPS from Rs 1,926 crore in
2021-22 (actuals) to Rs 5 crore in 2023-24 (budget gauges). In any case, when the
representatives who joined after the usage of the NPS start to resign from 2034 onwards, the
taking a toll of returning to OPS will be obvious. Appropriation of OPS is anticipated to
advantage the current era at the fetching of future era.

10.3 Committed consumption:

Committed consumption of a state regularly incorporates consumption on installment of

compensations, benefits, and intrigued. A bigger extent of budget apportioned for committed use
things limits the state's adaptability to choose on other consumption needs such as capital cost.In
2023-24, Rajasthan is assessed to spend Rs 1,29,963 crore on committed utilization, which is
56% of its assessed salary receipts. This comprises investing on pay rates (31% of revenue
receipts), annuity (11%), and intrigued installments (14%). Committed consumption is
anticipated to extend by 7% over the reexamined appraise of 2022-23. In 2022-23, use towards
compensations is evaluated to be 2% lower than the budget gauge

Add up to income receipts for 2023-24 are assessed to be Rs 2,33,988 crore, an increment of 8%
over the re-examined gauge of 2022-23. Of this, Rs 1,38,454 crore (59%) will be raised by the
state through its claim assets, and Rs 95,534 crore (41%) will come from the middle. Assets from
the center will be within the shape of the state's share in central charges (26% of income receipts)
and gifts (15% of income receipts).

10.4 Devolution:

In 2023-24, state's share in central charges is evaluated at Rs 61,552 crore, an increment of 8%

from the reexamined gauge of 2022-23. Awards from the middle in 2023-24 are evaluated at Rs
33,982 crore, a decline of 23% from the changed gauges for 2022-23.

10.5 State's claim charge income:

Rajasthan's add up to claim charge income is assessed to be Rs 1,14,169 crore in 2023-24, an

increment of 23% over the reexamined gauge of 2022-23. Possess charge income as a rate of
 23

GSDP is evaluated at 7.2% in 2023-24. For 2022-23, the state had assessed this proportion at
7.4%, be that as it may, as per reexamined gauges, it is anticipated to be lower (6.6%).

10.6 State evaluating to get GST emolument in 2023-24

When GST was presented, the central government ensured states a 14% compounded yearly
development in their GST income for a period of five years. Any shortage in a state's GST
income from this level is covered by the Middle by giving recompense gifts to the state. This will
be finished in June 2022. However, Rajasthan has been assessed to get GST remuneration
awards worth Rs 2,350 crore in 2023-24.In 2023-24, State GST is assessed to be the biggest
source of claim assess revenue (43% share). State GST income is assessed to extend by 36%
over the changed gauges of 2022-23. Be that as it may, in 2022-23, the receipt on this account is
anticipated to be 9% lower than budgeted. In 2023-24, income from deals charge/ VAT is
assessed to extend by 16% over 2022-23 revised estimates. Stamp obligation and charges on
vehicles are evaluated to extend by 10% and 15% individually.

10.7 Impact of the following trends as considered via wagner's law

The trends observed in Rajasthan's expenditure and fiscal policies may significantly affect
Wagner's Law, which posits that government spending tends to increase as a percentage of GDP
as economies develop. Let's analyze these trends in the context of Wagner's Law:

1. Growth in GSDP and Expenditure: The projected increase in Rajasthan's Gross State
Domestic Product (GSDP) and government expenditure for 2023-24 indicates economic
growth and higher spending by the government. If government spending grows at a faster
rate than GDP, it would support Wagner's Law.
2. Fiscal Deficit and Debt Repayment: The lower fiscal deficit target and the
government's aim to repay debt signify a prudent fiscal approach. However, if the
government continues to borrow to finance its expenditure, it may lead to an increase in
government spending relative to GDP, aligning with Wagner's Law.
3. Annuity Burden and Committed Expenditure: The potential increase in pension
liabilities and committed expenditure could strain the state's finances in the future. Higher
expenditure on committed items like salaries, pensions, and interest payments may limit
 24

the government's flexibility in allocating funds for other purposes, potentially supporting
Wagner's Law if these expenditures continue to rise as a proportion of GDP.
4. Revenue and Devolution: The increase in revenue receipts, including the state's share in
central taxes, may provide the government with more resources for expenditure.
However, a decline in grants from the central government could impact the state's ability
to finance its programs and may necessitate higher government spending relative to GDP,
in line with Wagner's Law.
5. GST Compensation and State Revenue: The anticipated GST compensation and
growth in state tax revenue indicate a reliance on indirect taxes for revenue generation. If
these revenues continue to grow faster than GDP, they could contribute to an increase in
government spending relative to GDP, supporting Wagner's Law.

Versions of Wagner’s Law

Version 1. Peacock-Wiseman version (1961)

The double log form function was employed by the Peacock-Wiseman Version of Wagner
legislation to calculate the effect of economic growth on public spending. This version assumed
that the growth rate of the real gross domestic product was an independent variable and the real
government expenditure was a dependent variable. It was therefore assumed that the real gross
domestic product must have a higher coefficient.

Version 2. Gupta (1967)

This version considered that the growth of real per capita government spending is dependent on
the growth of real per capita GDP and that the elasticity of real per capita government spending
with respect to real GDP must be greater than one. It used per capita real gross domestic product
and per capita government expenditure in the functional form.

Version 3. Goffman (1968)

This version of the law, also referred to as the absolute version, assumed that the rise in real GDP
per capita would be an independent variable and that real government spending would be a
 25

dependent variable. It also assumed that the coefficient of real per capita GDP would be greater
than one.

Version 4 Pryor (1969)

This neglected the effect of population increase on public expenditure and instead used the
government consumption expenditure as a dependent variable to explain the Wagner law.
According to the Pryor version, in order to explain the Wagner law, the output elasticity of
government consumption must be more than one.

Version 5. R. A. Musgrave and P. B. Musgrave (1969)

This implied that when GDP per capita rises, so should the public sector's percentage of GDP.
The real per capita GDP determines how much the nominal government spending share grows
relative to the nominal GDP, and the elasticity cannot be zero.

Version 6. Goffman and Mahar (1997) and Mann (1981)

The modified Peacock-Wiseman version, as it is also called, shows the proportion of public
spending to total output as a function of total output. In order to preserve the validity of the
Wagner hypothesis, this technique required the elasticity of the percentage of public expenditure
in total output with regard to total output greater than zero.

Tests used for Quantitative Analysis

1. Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR) Method

The Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR) method is a

statistical technique used for estimating and analyzing the dynamics among multiple time
series variables. It's particularly useful in econometrics for modeling and understanding
the interdependencies among economic variables over time.

Its key components are:

 26

Vector Autoregression (VAR): VAR models are used to describe the interdependencies
among multiple time series variables. Each variable in the system is modeled as a linear
function of past values of itself and other variables in the system.

Maximum Likelihood (ML): ML estimation is a method used to estimate the parameters

of a statistical model by maximizing the likelihood function. In the context of VAR
models, ML estimation involves finding the parameter values that maximize the
likelihood of observing the given data.

Johansen Procedure: The Johansen procedure, developed by Søren Johansen, is a

method used to estimate the parameters of a VAR model when the variables are
cointegrated, meaning they have a long-term relationship despite short-term fluctuations.
The procedure involves testing for the presence of cointegration and estimating the
cointegrating vectors, which represent the long-term relationships among the variables.

The Johansen ML VAR method allows researchers to analyze the long-term relationships
and short-term dynamics among multiple variables simultaneously, making it a powerful
tool for studying complex systems like economic markets.

Results

The following Screenshots were taken from Stata

 27

Table 1 and 2 Representing results of Johansen Maximum Likelihood (ML) Vector

Autoregressive (VAR) Method

The results of the Johansen Maximum Likelihood (ML) Vector Autoregressive (VAR)
Method examined the long run relationship between the variables in all the six versions
of Wagner law (as presented in Table 5 and 6). The cointegration test results revealed the
existence of one cointegrating vector in versions 1, 2, 3 and 4. This implies that there is a
long run relationship between government expenditure and net state domestic product in
Rajasthan. Whereas the version 5 and 6 has no long run relationship between the
variables as the Trace statistic and maximum Eigenvalue statistic indicate that the test
failed to reject the null hypothesis of no cointegration between the variables at 5 percent
level of significance.

2. Vector Error Correction Model

A statistical model known as a Vector Error Correction Model (VECM) is used to

examine the relationship between several time series variables, particularly those that are
non-stationary and show long-term equilibrium correlations. Here is a summary of the
duties performed by a VECM:

● Time Series Variables: A set of time series variables, typically represented as y

t, where t is time, are used in a vector equivalent chart (VECM). Economic
 28

indicators such as GDP, inflation, government spending, etc. could be these

factors.
● Stationarity: VECM presupposes that the time series variables be non-stationary,
in contrast to more basic regression models. This indicates that throughout time,
their variation and mean fluctuate. Cointegrating relationships, which are
combinations of these variables in a linear fashion, may, however, remain
stationary.
● Cointegration: The long-term equilibrium relationship between non-stationary
variables is referred to as cointegration. To find out whether there is a relationship
that is stable over time, you test for cointegration among the variables in a
VECM.
● Error Correction Term: The adjustment process leading to the long-term
equilibrium relationship is captured by the error correction term included in the
VECM. This term makes sure that the model is compatible with both short- and
long-term behaviors by taking into consideration the system's short-term
dynamics.

Results

The following Screenshots were taken from Stata

Table 3 and 4 Representing results of Vector Error Correction Model

 29

The results of Vector Error Correction Model for long run relationship between variables
for version 1, 2, 3 and 4 are presented The result states that unidirectional causality
running from government expenditure to net state domestic product in first version
(Peacock Version) of the Wagner law. The third version (Guffman Version) states the
one way causality from government expenditure to per capita net state domestic product.
The results of the fourth version (Pryor Version) also show the unidirectional causality
from Net State Domestic Product to government consumption expenditure. The results of
Vector Error Correction Long run causality states that there is no causality between per
capita net state domestic product and per capita government expenditure which was
suggested by the second version (Gupta Version) of the Wagner law because both the
hypotheses are accepted at 5 percent level of significant (the Error Correction term
neither correctly signed nor the significant).
 30

Conclusion

The analysis conducted on the six versions of Wagner's Law, utilizing the Johansen Maximum
Likelihood Vector Autoregressive (VAR) Method and cointegration tests, has provided valuable
insights into the relationship between government expenditure and net state domestic product in
Rajasthan. The findings reveal a nuanced understanding of the applicability of Wagner's Law in
the context of the state's economic dynamics.

In versions 1, 2, 3, and 4 of Wagner's Law, the cointegration tests indicate the presence of a long-
run relationship between government expenditure and net state domestic product. This suggests
that as the economy of Rajasthan develops, there is a tendency for government spending to
increase relative to the state's domestic product. This finding aligns with the core premise of
Wagner's Law, which posits that economic growth leads to an expansion of government
functions and, consequently, an increase in government spending.

Furthermore, the results of the Vector Error Correction Model (VECM) shed light on the
directionality of causality between government expenditure and net state domestic product in
these versions of Wagner's Law. In the Peacock Version (version 1), the findings indicate
unidirectional causality from government expenditure to net state domestic product. This
suggests that government spending has a significant impact on the state's economic output,
supporting the notion that as government functions expand, they stimulate economic activity and
contribute to growth.

Similarly, in the Guffman Version (version 3) and Pryor Version (version 4), unidirectional
causality is observed, albeit in different directions. In the former, government expenditure
influences per capita net state domestic product, highlighting the importance of public
investment in driving economic development. Conversely, in the latter, net state domestic
product influences government consumption expenditure, implying that economic growth may
lead to increased government spending to support public services and infrastructure.

However, the analysis reveals a contrasting result for versions 5 and 6 of Wagner's Law. The
cointegration tests indicate no long-run relationship between government expenditure and net
 31

state domestic product in these versions. Additionally, the Vector Error Correction Model does
not identify any significant causality between per capita net state domestic product and per capita
government expenditure in the Gupta Version (version 2). This suggests that the relationship
between economic growth and government spending may not conform to the patterns outlined in
Wagner's Law in these particular versions.

In conclusion, the findings of this analysis provide support for Wagner's Law in the context of
Rajasthan's economic dynamics, particularly in versions 1, 3, and 4. The presence of
cointegration and the directionality of causality between government expenditure and net state
domestic product underscore the relevance of government intervention in driving economic
growth and development. However, the contrasting results for versions 5 and 6 highlight the
complexity of the relationship between economic variables and the need for further research to
understand the determinants of government spending in different contexts. Overall, the analysis
contributes to our understanding of the role of government in fostering economic development
and informs policy decisions aimed at promoting sustainable growth in Rajasthan.
 32

References

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