FISCAL POLICY AND THE ECONOMIC GROWTH: A COMPARISON BETWEEN SRI LANKA AND INDIA

Abstract

During the past decades, both India and Sri Lanka faced different public policy circumstances, a relatively short period of time, which resulted in a significant impact on the economic growth of both countries. This paper comparatively reviews the theoretical and empirical evidence on the effect of fiscal policy variables and government expenditure programs which focused on economic growth in India and Sri Lanka. The Estimated results confirm that in the long run using the Engel Granger Cointegration Test Total Government Spending will improve the GDP by 1% in Sri Lanka while Indian economy will improve by 59%. The total tax revenue will increase the GDP by 51% in Sri Lanka while in India, it will be 57%. In the short run there is no significant impact of fiscal policy variables on economic growth in Sri Lanka but Indian economy grows with the expansionary fiscal policy which was tested by the Error Correction Mechanism. According to obtained results, the Impulse Response Function strives when an external shock affects the total government spending level and the Sri Lankan economy does not adequately respond to such instances but Indian economy is strong enough to handle the external shocks which affect the country’s spending level.

Keywords: Fiscal Policy, Recurrent Expenditure, Capital Expenditure, Direct Taxes, Indirect Taxes, Expansionary Policy