Effect of Capital Expenditure on Economic Growth in Nepal

The government of Nepal has allocated substantial funds to key Ministries with the aim of promoting economic development, primarily focusing on education, health, agriculture, and transportation sectors. Despite these increased expenditures, there is ongoing debate regarding the actual effect of government spending on economic growth. This research critically analyzes the effects of major government capital expenditure on economic growth in Nepal, specifically examining public spending in education, health, agriculture, and transportation. The study objectives include assessing how public capital expenditure in these sectors influences economic growth in Nepal. Using a causal relationship approach, the study utilizes secondary data obtained from the Ministry of Finance and Central Bureau of Statistics covering the period from fiscal year 1990/91 to 2021/22. The research formulated four hypotheses, including one suggesting that increased expenditure does not lead to higher Real Gross Domestic Product (RGDP). Methodologically, the study employs the Johansen cointegration test and Error Correction Method (ECM) to analyze the relationships among variables. Prior to analysis, the data underwent stationarity tests and necessary preprocessing for accuracy. The findings, based on short-run and long-run relationships identified through three cointegrating equations, indicate that expenditure on health, agriculture, and transportation significantly and positively correlates with RGDP at the 5% significance level. However, expenditures on education were found to be statistically insignificant in their effect on RGDP. Furthermore, the study reveals a positive and significant relationship between expenditure on agriculture and education. As a result, the study recommends that the government consider increasing allocations to health, agriculture, and transportation sectors to foster economic growth effectively. In conclusion, the research underscores the importance of targeted public capital expenditure in specific sectors to achieve sustainable economic growth in Nepal, highlighting nuances in the effect of government spending across different domains.