The twin objectives of this paper have been to empirically investigate the validity of Wagner’s law of increasing government activities (or public expenditure) in case of India over the period 1980-2019, and logically moving ahead to configure Displacement effect of Covid -19 pandemic in it as coined by Wiseman Peacock hypothesis. Hence it was to necessary to estimate trend growth of public expenditure for using it as baseline scenario of ‘No Covid’ and to use it further to check displacement effect towards the end of the public expenditure series. The general increase in public expenditure overtime is best explained by Wagner’s law which states that government activities increase intensively and extensively with economic development, hence the need for testing empirical relationship from GDP to public expenditure. The inverse relationship from public expenditure to GDP was simultaneously hypothesised to test Keynesian multiplier effect of government expenditure on national income. For testing the mutual dependence, ADF test for stationarity was applied first followed by testing long run and short run bi-directional causality between economic growth and central public expenditure using co-integration and Error Correction Model. Both the variables were observed to be cointegrating thereby signifying equilibrium relationship between them. The ECM test brought out the fact that the short-run changes in GDP have a positive impact on the short-run changes in total expenditure of central government of India. The direction of relationship between the two was tested using Grangers Causality test which depicted positive and significant relationship overtime with unidirectional causality from GDP to total expenditure thus validating Wagner’s Law. Next displacement effect was analysed. Actually Wiseman-Peacock made an improvisation over the Wagner's law by establishing that public expenditure does increase in the long run but it does not increase continuously rather undergoes structural shifts at intervals due to social and economic upheavals. For deciding whether displacement in public expenditure due to Covid-19 occurred or not first trend growth in the central government public expenditure was estimated (CAGR 12.7 percent per annum) for the period 1980-2019. Considering this trend growth as the baseline scenario (had Covid not been there), the figure was compared with the Covid time increased public expenditure due to relief package using graphical analysis. As the breakpoint of year 2020 was known a- priori, the classical test for structural break developed by Chow (1960) was applied on central government expenditure. Though the empirical results substantiated the applicability of Wagner’s law in India till 2019, no significant displacement effect was found in Public expenditure due to Covid-19.
Keywords: Covid-19, Wagner’s Law in India, Wiseman-Peacock hypothesis and India