Using univariate and multivariate time series analysis, like panel unit root test and panel co-integration, and the Toda–Yamamoto causality test, the causal relationship between economic development and public expenditure is examined in 28 states of India at different stages of development from 2003 to 2015. In relatively developed and less developed states, a causal flow exists from real sector growth to increase in public expenditure, in line with Wagner’s hypothesis. In least developed states, however, bidirectional causality exists between both capital and revenue expenditure to growth, and from growth to capital and revenue expenditure.
