Research Methodology Project

RESEARCH METHODOLOGY
PROJECT
TOPIC
IMPACT OF FISCAL POLICY ON ECONOMIC GROWTH
MEMBERS NAME
Jaspreet Singh Naman Gulati Kushi Taneja
Japman Singh Nishchay
Introduction
Fiscal policy refers to Government's adjustment of spending and taxes to achieve certain macroeconomic
objectives. Economic growth, price stability, balance of payments equilibrium, and exchange rate stability are
the most important macroeconomic objectives.
According to Keynesian theory of fiscal policy, an increase in public spending can increase aggregate demand
leading to output growth depending on size of expenditure multipliers.
Taxation usually gets less attention of the analysis of the relationship between fiscal policy and economic
growth of a country in the analysis of the relationship between fiscal policy and economic growth of a country.
Therefore, to examine the impact of fiscal policy on economic growth and economic stability, both taxation and
public spending could and should be considered separately.
To Examine the impact of fiscal policy on economic growth I focus on Two South Asian countries that share
goals of socio-economic development and also are members of the South Asian Association for regional
cooperation (SAARC). India and Sri Lanka are founding members of SAARC, I have narrowed down my research
to these countries based on their Similar Geographical, economic and social background.
Therefore, to examine the impact of fiscal policy on economic growth and economic stability, both taxation and
public spending could and should be considered separately.
Literature Review
• In this Section of the paper, a series of previous Research and studies on the subject of fiscal policy and their
relation to economic growth in a number of countries will be presented in order to gain a deep understanding
of the nature of relationship between the fiscal policy and economic Growth, as Follows
• Oguanai and Ogunta Examined the Impact of fiscal policy variables on the economic growth of Sub-Saharan
African Countries.
• Montiel and Serven (2006) try to explore the Reasons for the Ineffectiveness of Fiscal Policy Reform that
Developing Countries Pursued in the 1990s. The Find that the Policy Reform Actually Brought slow growth and
frequent Financial Crises in the reform countries.
• Gemmell (2011) use 30 Years of Data to test for Aggregate Short and long run growth impacts of Fiscal Policy
in OECD Countries.
• Day and Yang (2010) use a Keynesian growth model and take a long-term view over 70 years from the 1930s
to 2007 to find that the long run growth effect of increasing government spending or decreasing tax rely on the
marginal propensity to consume and invest, and the effect can be positive under certain Circumstances.
• Zabiullah Tested the Role of Fiscal Policy in developing of Indian Economy: A Conceptual Observation. This
Study was Based on the Source of Secondary Data such as the role of Fiscal Policy in influencing the Indian
Economy and its Evolution in addition to articles, magazines and books and so on the study found that Fiscal
Policy has an Influential Role in The Indian Economy.
Objective
To Study the Impact of Trade and GFCF on
GDP
To Study the Impact of Government

Expenditure and Tax Revenue on GDP
To Study the impact of Fiscal policy Variables on the

Economic Growth (GDP) of Developing Countries
Research Methodology
Research Design
This chapter develops an empirical model to understand the relationships between Fiscal policy variables
and Economic growth in Two countries of South Asia India and Sri Lanka.
Model
The purpose of this study is to examine whether and how Government expenditure and Tax revenue-the two
main instruments of fiscal policy-impact economic growth of the developing countries in South Asia.
Several other factors that seem important in growth will also be included as independent variables.
1) Gross Fixed Capital Formation (GFCF)
2) Trade Openness
TECHNIQUES USED FOR ANALYSIS
Some Test (Descriptive Statistics, Regression and Correlation Analysis have been applied on given Variables to
test the effect of Fiscal Policy Variables on Economic Growth or GDP.
Descriptive Statistics
• Descriptive Statistics Gives Mean, Median, Mode, Standard Deviation, Variance, Kurtosis and Skewness of the
Variables. In this Skewness and Kurtosis should be equal to Zero for Normal Distribution.
Correlation Analysis
• Correlation Means the Relationship between Two Variables. The Correlation shows two things, first it shows
the direction between two variables and secondly it shows the strength of Association between two Variables.
Regression Analysis
• It is a Statistical Technique used to determine the strength of relationships between dependent Variable
(GDP) and Independent Variables (Government Expenditure, Tax Revenue, Gross Fixed Capital Formation
(GFCF), Trade Openness).
Descriptive Statistics (INDIA)
Descriptive Statistics (Sri Lanka)
Interpretation
The Distributions are Non-Normal as the Valves of Skewness and Kurtosis
are non-Zero.
Some of the Variables are Negatively Skewed and Some are Positively
Skewed.
Government Expenditure and GFCF are Negatively Skewed While GDP,

Tax Revenue and Trade Openness are Positively Skewed.
All the Variables are Leptokurtic Nature. Hence the Null Hypothesis is
Rejected as Mean, Median and Mode are not Equal and it is not a case
of Normal Distribution.
Regression Analysis
INDIA
Sri Lanka
Conclusion
This Project set out to study the impact of fiscal policy on economic growth in two
South Asian Developing countries- India and Sri Lanka.
• Econometric Models were developed with the aid of -
(a) Literature on the relationship between fiscal policy and growth.
(b) trends in government expenditure, tax revenue and output growth in south Asia
and (c) an understanding of the properties of data from sample countries.
• Empirical results shows that the government consumption expenditure does not
have an impact on the economic growth and neither does the Tax Revenue. On the
other hand, GFCF have large and highly significant growth effects.
• This paper focused on the importance of fiscal policy and its role in the economic
growth and economic development through various financial policy instruments.
Recommendations
• For future research it would be strongly advisable to distinguish between
public and private investments which may have different effects on growth.
South Asian counties severely lack physical and social necessary to sustain a
higher growth rate that the countries have been trying to achieve.
• Examples would be investment on education and health for a faster
accumulation of human capital Versus investments in roads and bridges for
faster accumulation of physical capital.
• It may be desirable to check the endogeneity of Trade. A Faster GDP
growth tends to create surplus production that is then exported. If so,
finding an instrument for trade would be necessary to apply instrumental
variable regression technique.

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RESEARCH METHODOLOGY

To Study the Impact of Government

To Study the impact of Fiscal policy Variables on the

Government Expenditure and GFCF are Negatively Skewed While GDP,

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