Abstract :
Background: Fiscal policy has long been considered as a vital instrument for economic growth and stability; yet, the increasing fiscal burden arising from deficit financing raise serious concerns, especially in developing nations like India. The significance of deficit financing as a policy measure to enhance investment has been examined using the proxies of fiscal deficit and capital formation.
Materials and Methods: The study utilized time series data for analysis, employing techniques such as Unit Root Tests, Johansen Cointegration, Granger Causality, Variance Decomposition, and Impulse Response Function to derive valuable insights.
Results: Fiscal deficit of state and general government increased significantly during the study period. However, econometric tests show no long-term or casual association between fiscal deficits and capital formation. Variance decomposition indicates that both variables explain their own variations.
Conclusions: The optimum level of fiscal spending must be determined to prevent excessive burden on the economy.
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