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.
