MILITARY SPENDING AND ECONOMIC

GROWTH: A COMPARATIVE STUDY OF

INDIA AND USA

Deepali (2K18/BAE/16) and

Shivali Jain(2K18/BAE/92):Section B
Bachelors in Economics Honours, 3rd year; Delhi Technological University
 INTRODUCTION
Within the formation of the economy, states aimed to fulfill their prerequisites also to ensure themselves from the dangers of other nations.
Hence they always separated a portion for military spending from their budget. A military budget or military expenditure is the amount of
monetary assets a state devotes to raise and maintain equipped forces or other strategies vital for defense purposes. It is also known as a
defense budget. This study empirically examined the impact of military expenditure on economic growth in INDIA over the years. A time
series data of 30 years (1990-2019) has been taken for analysis. Ordinary Least Square (OLS) technique of data analysis is used in
evaluating the secondary data. The paper aims to carry out a comparative analysis between two major powerful nations in terms of military
power. One is developed country i.e. USA. In 2019, U.S. military expenditure increased by almost 5.3% to $732 billion and it ranks first in
terms of military spending and other is a developing country i.e. India. Despite being a developing country, India ranks third in terms of
military spending Using a statistical and econometric approach, we look at how each country's military expenditure reacted to increments
in economic growth and government expenditure amid the period 1990-2019, and they offer clarifications for the relationship in each
nation. GDP Growth (Annual %) and Ln(GDP in current USD) are used as a proxy variables for Economic Growth, (Military Expenditure
in current USD) and Military Expenditure (% of GDP) are used as measures of military spending along with some other variables. To the
extent of our knowledge, the existing readings have examined how economic growth changes when there are trends in military expenditure
of a nation. But in this paper we will investigate the inverse relation that is how military spending changes due to the trends in economic
growth and government expenditure for India and USA. This inverse relationship will play a vital role to fill the gap between the
relationship of military expenditure and economic growth. This study differed in the methodology and the time period taken for analysis.
To the best of our knowledge, this kind of analysis has not been carried out much by researchers before for both the US and India case in
same paper and for the time period taken in this paper.
 LITERATURE REVIEW
Khalek, Mazloum, Zeiny in their research paper ‘Military Expenditure and Economic Growth: The Case Of India’ published in 2019 shows absence of
causal relationship between military expenditure and economic growth in India, during the period 1980-2016. They observed that despite the absence of
direct role of military expenditure on economic growth during the period 1980-2016, the Indian military industry has supported Indian development and
economic growth through technological spillover to the civilian sectors, thereby raising productivity and enhancing growth.

Raju and Ahmed in their article ‘Effect on Military Expenditure On Economic Growth: Evidence from India, Pakistan and China using cointegration
and causality analysis’ published in 2019 have shown a short and long run relationship between GDP Growth and Military Expenditure. In this analysis
they used only two variables, data of GDP Growth and data of military expenditure as percentage of GDP as the value of military expenditure.Econometric
analysis was done to investigate the relationship between GDP growth and military expenditure for the 3 countries. The results showed a positive long
run relationship and long-run causality from military to GDP growth at 5% level of significance upto a specific period, but no short run relationship for all
the three countries. Authors concluded that relationships may vary from geography to geography because the economical factors are largely affected by its
internal and external factors.

Heo in his research article 'The Relationship between Defense Spending and Economic Growth in the United States' (2010) took the data for GDP,
private-sector savings, employed labor, capital depreciation, and defense spending. He used the OLS method to test the augmented Solow Model and a
three sector Feder-Ram-based defense–Growth Model. In the model, growth rate of gross domestic product; growth rate of employed labor; investment
share of GDP; changes in defense spending share of GDP; growth rate of defense spending; changes in non-military government spending share of GDP;
and growth rate of non-military government spending are the empirical measures employed for Feder-Ram-defense growth model. In his study the
empirical results of both models shows that defense spending does not significantly affect economic growth.
Desli and Gkoulgkoutsika in their research study ‘Military spending and economic growth: a panel data investigation’ published in
2020 examined the worldwide effect of military spending on economic growth for the period 1960–2017. The authors also focussed on
the series of significant events that influenced the military spendings during this period, like the 2001 terrorist attacks. The results
showed that the overall effect of the military spending on economic growth at a worldwide level is negative for the period 1960–2017,
but it seems to be linked to the early years of the period immediately following the end of cold war, with the cold war era (1960–1990)
and the most recent years, especially since the start of the financial crisis, offering scarce evidence of an effect, as extensive time periods
with no statistically significant effects were observed.

Mohanty, Panda and Bhuyan in their research article ‘Does Defence Spending and its Composition Affect Economic Growth in
India?’ published in 2020 investigated the relationship between economic growth and defence expenditure in India from 1970–1971 to
2015–2016 by using the Autoregressive Distributed Lag and Toda-Yamamoto Granger Causality approach. The study involved variables
like GDP, gross domestic capital formation,defence expenditure, revenue and capital defence expenditure, export, import and
population. The empirical results showed that defence expenditure has a positive and significant impact on economic growth in India.
The study also found that capital defence expenditure has a positive and significant effect on economic growth, while revenue defence
expenditure does not have any substantial influence on it. The authors suggested that defence spending, especially capital defence
spending, should be encouraged to enhance economic growth in the Indian economy.

Heo and Eger III in their research article ‘Paying for Security: The Security-Prosperity Dilemma in the United States’ published in
2005 investigated the direct and indirect effects of defense spending on economic growth by developing a multilink defense-growth
model using investment, employment, and exports and testing it with U.S. data for the time period from 1951 to 2000. Authors tested
the direct and indirect impacts of defense spending on growth using a nonlinear four-sector production function model incorporating
labor, capital, technology, and exports.The results showed that defense spending has a negative, indirect effect on economic growth via
investment and export while the direct impact on growth seems to be rather small. Nonmilitary government spending had economic
effects on growth found to be similar to those associated with military spending.
Jalil, Abbasi and Bibi in their research paper ‘Military expenditures and economic growth: allowing structural breaks in time series
analysis in the case of India and Pakistan’ published in 2015 investigated the long run relationship between military expenditures and
economic growth in case of Pakistan and India using time series data. Data on variables like per capita GDP, GDP education expenditures,
Consumer Price Index (CPI), trade openness, expenditures to GDP ratio, etc are used for the study. A positive relationship between
military expenditures and economic growth at the initial stages was observed and then the results showed a negative relationship after a
critical point for both countries. The results also showed that the military expenditures can explain the per capita GDP in the short run and
that the causality runs from military expenditures to GDP.

Mustafa in his research study ‘India’s Defence Spending Trends From 2004-2014: A Status Without Human Development’ published in
2014 represents a consolidated study on the trends of Indian defence spending over a period of 10 years and links the Indian defence
spending trends to the poor state of human development in India. The paper has been divided into two sections. First section identifies
how much India has spent on its defence in the past ten years, from 2004-2014 through variables like arms imports/exports, defence
spending of world militaries, and military balances of key international states.The second section of the paper studies whether India has
been able to address its key human development challenges. The results show that rapid defence spending of India can destabilise the
regional peace, and India cannot acquire a major power status by neglecting its key human development issues. Huge defence spending
cannot protect a nation against internal social and economic deprivations.

Pieroni in his study ‘Military expenditure and economic growth’ published in 2009 tests the relationship between military expenditure
and economic growth. He empirically considers the hypothesis of a nonlinear effect of military expenditure on economic growth. The
framework uses a representative household that consumes, accumulates and pays taxes with respect to a single composite commodity.
Formally, the aggregate production function is assumed to include private capital stock, k; military government expenditure,1 g; and non-
military government expenditure, 2 g. The production function is Cobb-Douglas. The results confirm that the relationship between
military expenditure and growth might contain nonlinearities other than those hypothesized by traditional growth models in which the
appropriate control variables are not included. In this direction, the nonparametric approach seems to be a useful tool for future research to
avoid functional misspecifications in the growth equation.
Rahman and Siddiqui in their research paper ‘The Effect of Military Spending on Economic Growth in the Presence of
Arms Trade: A Global Analysis’ published in 2019 explored the fact whether the economy grows with the rise of military
spending or vice versa. The research work comprised various independent variables including military spending, and explored
their effect on economic growth and per capita income over 85 countries for the last 20 years i.e. from 1998 to 2017. Models
suggested that the impact of defense expenditure (DE) on economic growth is negative since left less money to invest in other
areas like infrastructure, health, education and production of routine goods. One notable change depicted in the interaction
effect of military spending and arms exports is that it had a positive and significant effect, showing a positive
complementarities between the two. This shows that military spending itself has a negative effect but if it is complemented by
arms exports, that spending turns favorable for GDP in both the models.

OBJECTIVES OF THE RESEARCH

Military Spending often reflect how strongly a nation sees the probability of dangers against it, or the
amount of aggression it wishes to summon. At the same time it also gives an idea of how much financing
ought to be given for the upcoming fiscal year. The measure of a military budget moreover reflects the
country's capacity to fund military activities. So this topic has been selected with the main objective to examine
the effect of change in economic growth and government spending on military expenditure in India and USA over
the time period 1990-2019 by using regression analysis, statistical measures and graphical analysis for different
variables. The aim of this paper doesn’t limit only to see this effect but also conduct a comparative study of this
impact in USA and India to see how this relation will vary in developed and a developing country.
The aim of this paper doesn’t limit only to see this effect but also conduct a comparative study
of this impact in USA and India to see how this relation will vary in developed and a
developing country.

DATA SOURCES AND VARIABLES

DATA SOURCE: For the study, secondary data has been taken from the Handbook of Statistics
on Indian Economy-RBI, 2020 and the World Bank, https://www.usgovernmentspending.com

VARIABLES : Measures of military spending like Ln (Military Expenditure in current USD)

and Military Expenditure (% of GDP) are used as dependent variables.
Ln (GDP in current USD) and GDP Growth (Annual %): Proxy variables for Economic
Growth, Ln (Total Central Government Expenditure in $ crores), US Total Government
Expenditure ($ Trillion) are taken as independent variables to see how the change in GDP and
Government Expenditure impact Military Spending.
 METHODOLOGY
The type of research for comparing the impact of Economic Growth and
Government Spending on military spending in India and USA is quantitative
and will have an analytical approach to it. To study this impact for the two
countries we have taken time series data for the time period 1990-2019.
Statistical technique regression analysis and statistical measures like coefficient
of determination (R2) and correlation are used for the analysis of different sets
of variables. Graphical Analysis for the variables will also be done. The results
for the above mentioned technique, measure and graphical analysis will be
carried out through Eviews software.
 RESULTS

FIGURE 1
In figure 1, For India
c is taken as the dependent variable. Ln (GDP in current USD) and
Ln (Total Central Government Expenditure in $ crores) have been taken as independent variables.
C is the intercept term of the regression equation.
Regression Equation:
∧
LMILEXPINDOLLAR = -0.870987 + 0.892393 LGDPINDIADOLLAR + 0.024785 LTOTALGOVTEXPINDOLLARCR

➔ The interpretation of coefficient of LGDPINDIADOLLAR of about 0.8924 is that if

we increase the GDP (current USD) by 1%, on an average Military Expenditure
(current USD) increases by 0.89%, keeping the impact of Total Central Government
Expenditure (in $ crores) constant.

➔ Similarly, holding the impact of GDP (current USD) constant, if we increase the Total
Central Government Expenditure (in $ crores) by 1%, on an average Military Expenditure
(current USD) increases by 0.02%.
Relatively speaking, it seems that in case of India, a percentage increase in GDP
(current USD) contributes more towards the Military Expenditure (current USD) than a
percentage increase in the Total Central Government Expenditure (in $ crores).
The coefficient of determination (R2) = 99.3% is also very high.
The slope coefficient of Ln (GDP in current USD) appears to be highly significant since
the p-value is 0.0000 which is less than 0.05 and also, the t-value is more than 2 (taken as
t critical by Rule of Thumb).

The slope coefficient of Ln (Total Central Government Expenditure in $ crores) appears

to be insignificant since the p-value is more than 0.05 and also, the t-value is less than 2
(taken as t critical by Rule of Thumb).
FIGURE 2
n figure 1, For USA
Ln (Military Expenditure in current USD) is taken as the dependent variable. Ln (GDP in current USD) and
Ln (Total Central Government Expenditure in $ crores) have been taken as independent variables. C is the
intercept term of the regression equation.
Regression Equation:
∧
LMILEXPUSADOLLAR = 29.39771 -0.117590 LGDPUSADOLLAR + 0.224490 USGOVTEXPDOLLAR
➔ The interpretation of coefficient of LGDPINDIADOLLAR of about 0.1176 is that if
we increase the GDP (current USD) by 1%, on an average Military Expenditure
(current USD) decreases by 0.12%, keeping the impact of Total Central Government
Expenditure (in $ crores) constant.

➔ Similarly, holding the impact of GDP (current USD) constant, if we increase the US Total
Government Expenditure ($ Trillion) by 1%, on an average Military Expenditure
(current USD) increases by 0.22%.
Relatively speaking, it seems that in case of USA, a percentage increase in GDP will lead
to increase in the US Total Government Expenditure ($ Trillion).
The coefficient of determination (R2) = 89.4%.
The slope coefficient of Ln (GDP in current USD) appears to be insignificant since the p-value is 0.6330
which is more than 0.05 and also, the t-value is less than 2 (taken as t critical by Rule of Thumb).

The slope coefficient of US Total Government Expenditure ($ Trillion) appears to be significant since
the p-value is less than 0.05 and also, the t-value is more than 2 (taken as t critical by Rule of Thumb).

Comparing the R2 ( Coefficient of Determination) of both the models, it an be observed that in case of
India, R2 =0.993279 implying that 99.3% of the variation in the Military Expenditure (current USD) can
be explained by the GDP (current USD) and Total Central Government Expenditure ( $ crores). The
remaining 0.7% variation is unexplained. In case of USA, R 2 = 0.884287 implying that 88.4% of the
variation in the Military Expenditure (current USD) can be explained by the GDP ( current USD) and
Total Central Government Expenditure ($ crores). The remaining 11.6% variation is unexplained. Thus,
the regression model in case of India appears to be a better one.
GRAPH 1
GRAPH 2
GRAPH 1 (INDIA)
X-axis depicts the values of Ln (GDP of India in current USD ) taken as independent variable.
Y-axis depicts the values of Ln (Military Expenditure of India in current USD) taken as the dependent variable.
The red line in the figure is the regression line showing the predicted values of Ln (Military Expenditure in current USD) for the given
possible values of Ln (GDP in current USD).
The blue scattered points reflects the actual data values of the dependent and independent variables taken in the model.

GRAPH 2 (INDIA)
X-axis depicts the values of Ln (total government expenditure in current USD) taken as Independent variable.
Y-axis depicts the values of Ln ( Military Expenditure in current USD) taken as the dependent variable.
The red line in the figure is the regression line showing the predicted values of Ln ( Military Expenditure in current USD) for the given
possible values of Ln ( total government expenditure in current USD)
The blue scattered points reflects the actual data values of the dependent and independent variables taken in the model.

The distance between red line and blue points represents the residual in the regression model.
The residual shows the difference between the observed dependent variable value (from scatter plot) and the predicted value of the
dependent variable here, Ln ( Military Expenditure in current USD) which we get from regression equation line.
GRAPH 3
GRAPH 4
GRAPH 3 (USA)
X-axis depicts the value of Ln ( GDP of USA in current USD) taken as Independent variable.
Y-axis the value of Ln ( Military Expenditure of USA in current USD) taken as the dependent variable.
The red line in the figure is the regression line showing the predicted values of Ln ( Military Expenditure in current
USD) for the given value of Ln (GDP of USA in current USD)
The blue scattered points reflect the actual data values of the dependent and independent variables taken in the model.

GRAPH 4 (USA)
X-axis depicts the value of US Total Government Expenditure ($ Trillion) taken as Independent variable.
Y-axis depicts the value Ln (Military Expenditure in current USD) taken as dependent variable
The red line in the figure is the regression line showing the predicted values of Ln (Military Expenditure in current
USD) for the given values of Total Government Expenditure ($ Trillion).
The blue scattered points reflect the actual data values of the dependent and independent variables taken in the model.

The distance between red line and blue points represents the residual in the regression model.
The residual shows the difference between the observed dependent variable value (from scatter plot) and the predicted
value of the dependent variable here, Ln ( Military Expenditure in current USD) which we get from regression equation
line.
Comparing Graph 1 and Graph 3 it can be observed that regression model in
case of India appears to be be a better one, because the gap between the actual
values and the predicted values i.e. Residual is less in case of India than in case
of USA.
Similarly, comparing Graph 2 and Graph 4 it can be observed that regression
model in case of India appears to be be a better one, because the gap between
the actual values and the predicted values i.e. Residual is less in case of India
than in case of USA.
GRAPH 5
GRAPH 6
GRAPH-5
Graph 5 illustrates the Military Expenditure of India (as a % of GDP) between the period 1990-2019.
The X-axis represents the time period 1990-2019.
The Y-axis shows the value of military expenditure (as a % of GDP).
From the graph, we can observe there are many fluctuations in the military expenditure ( as a % of GDP) for the period 1990-2019.
The graph of India indicates various small and big V-shape fluctuations between different years during the period 1990-2019.
The military expenditure (as a % of GDP) is not stable and swiftly changes over the period.
Highest Military expenditure (% of GDP) in India was reported at 3.146 in 1990 and the lowest was reported at 2.343 % in 2007.

GRAPH-6
Similarly, the second graph illustrates the Military Expenditure of USA (as a % of GDP) between the period 1990-2019.
The X-axis represents the time period 1990-2019. The Y-axis shows the value of military expenditure (as a % of GDP).
From the graph, we can observe there is less fluctuations in the military expenditure ( as a % of GDP) for the period 1990-2019 as compared to India’s
case.
Highest Military expenditure (% of GDP) in USA was reported at 5.605 % in 2019 and the lowest was reported at 3.086% in 1999.
The military expenditure ( as a % of GDP) was high before the year 1990, but it suddenly started falling after 1990 because of the global peace and no
war expectations.
The military expenditure ( as a % of GDP) again started rising by the year 2000 due to the terrorist activities rising day-by-day in the world and in the
USA also.
CORRELATION (INDIA)

FIGURE 3

The given table is a cross sectional table illustrating correlation between different variables of India.
As, we can observe that, in these results the Pearson Correlation (r) between every variable is close to +1, which
indicates that there is a strong positive correlation between any two variables.
To illustrate our point, let’s turn to the table.
Pearson correlation (r) between Ln(GDP in current USD) and Ln (Total government expenditure in $ crores) is about
0.988118, which indicates that there is a highly positive relationship between these variables. In other words we can
say as Ln(GDP in current USD) rises, Ln (Total government expenditure in $ crores ) will also rise and. Similarly if
Ln(GDP in current USD will fall, Ln (Total government expenditure in $ crores) will also fall and vice-versa.
Similarly, Pearson correlation (r) between Ln(GDP in current USD) and Ln(Military expenditure as a % of GDP)is
about 0.996620; Pearson correlation (r) between Ln (Total government expenditure in $ crores) and Ln(Military
expenditure as a % of GDP) is 0.985578; Pearson correlation (r) between Ln(Military expenditure as a % of GDP)
with Ln(GDP in current USD) and Ln (Total government expenditure in $ crores) is 0.996620 and 0.985578
respectively.
Through correlation, at the end we can conclude that all the variables in the model indicate a highly positive
relationship with each other.

CORRELATION (USA)

FIGURE 4
The given table is a cross sectional table illustrating correlation between different variables of USA.
As we can observe that, in these results the Pearson Correlation (r) between every variable is close to +1,
which indicates that there is a strong positive correlation between any two variables.
To illustrate our point, let’s turn to the table.
Pearson correlation (r) between Ln(GDP in current USD) and government expenditure (in $ trillion) is
about 0.968390, which indicates that there is a highly positive relationship between these variables. In
other words we can say as Ln(GDP in current USD) rises, government expenditure (in $ trillion) will
also rise and if Ln(GDP in current USD) will fall, government expenditure (in $ trillion) will also fall.

Similarly, Pearson correlation (r) between Ln(GDP in current USD) and Ln(Military expenditure as a %
of GDP) is about 0.907773; Pearson correlation (r) between government expenditure (in $ trillion) and
Ln(Military expenditure as a % of GDP) is 0.945189; Pearson correlation (r) between Ln(Military
expenditure as a % of GDP) with Ln(GDP in current USD) and government expenditure (in $ trillion)
is 0.907773 and 0.945189 respectively.
Through correlation, at the end we can conclude that all the variables in the model indicate a highly
positive relationship with each other.
 CONCLUSION
From Regression Analysis,
In case of India, the slope coefficient of Ln (GDP in current USD) taking Ln (Military Expenditure in current
USD) as the dependent variable appeared to be highly significant. But the slope coefficient of Ln (Total
Government Expenditure in $ crores) taking the same dependent variable Ln (Military Expenditure in current
USD) was found to be insignificant.
In case of USA, the slope coefficient of Ln (GDP in current USD) Ln (Military Expenditure in current USD) as
the dependent variable appeared to be insignificant. But the slope coefficient of US Total Government
Expenditure ($ trillions) taking the same dependent variable Ln (Military Expenditure in current USD) was
found to be significant.

Comparing the coefficient of determination (R2) of the regression models of India and USA it was observed
that regression model in case of India appeared to be a better one.

Comparing graph 1 and graph 3 depicting dependent variable Ln (Military Expenditure in current USD) on the
Y-axis and Ln (GDP in current USD) as independent variable on X-axis for India and USA respectively, it can
be observed that regression model in case of India appeared to be a better one since the gap between the actual
values and the predicted values i.e. Residual was less in case of India than in case of USA.
Comparing graph 2 and graph 4 depicting dependent variable Ln (Military Expenditure in current USD)
on the Y-axis.Ln (Total Government Expenditure in $ crores) has been taken as independent variable on
X-axis for India and US Total Government Expenditure ($ Trillion) has been taken as independent
variable on X-axis for USA, it can be observed that regression model in case of India appeared to be a
better one since the gap between the actual values and the predicted values i.e. Residual was less in case of
India than in case of USA.

Comparing the graphs of India and USA depicting Military Expenditure (as a % of GDP) for the time
period 1990-2019 we can conclude that the military expenditure (as a % of GDP) of USA is more stable
and gradually changes over the period than that of India.
In case of both India and USA, through pearson correlation (r) we could conclude that all the variables in
the model show a highly positive relationship with each other.
THANK YOU