Impact of Capital Expenditure and Economic Growth on Unemployment in India

This study investigates the impact of government expenditure—disaggregated into capital and recurrent expenditure—along with private investment on the unemployment rate in India from 1990 to 2023. Utilizing an econometric model, unemployment is analyzed as a function of government spending (both capital and recurrent), the real GDP growth rate, Gross Capital Formation as a percentage of real GDP, and private investment. The stationarity of the time series data was assessed using the Augmented Dickey-Fuller (ADF) test, ensuring robustness in the model. An error correction model (ECM) was employed to capture both short- and long-term dynamics between unemployment and explanatory variables such as capital and recurrent government expenditure, private investment, real GDP growth rate, and Gross Capital Formation. The results confirm that capital expenditure significantly reduces unemployment in both the short and long run, while recurrent expenditure shows no statistically significant effect. Private investment and real GDP growth also positively correlate with employment generation. These findings suggest reallocating resources from recurrent to capital expenditure, stimulating private sector investment, and effectively designing sector-specific incentives to reduce unemployment. Key statistical results include a significant negative relationship between capital expenditure and unemployment, with the study making several actionable policy recommendations: (i) systematically reduce recurrent expenditure to reallocate resources towards capital spending, thereby generating employment; (ii) eliminate price controls and structural rigidities to foster competition and stimulate private sector investment; (iii) implement sustainable subsidies to encourage private sector investment; and (iv) design comprehensive incentive packages targeting key employment-generating sectors such as agriculture, transportation, energy production, telecommunications, and manufacturing & mining, to substantially reduce unemployment.