Wagner's Law and Indian Economy

German economist Adolph Wagner stated that the advent of modern industrial society will result in increasing political pressure for social progress and increased allowance for social consideration by industry. He suggested that a welfare state evolves from capitalist economy because for winning elections government constantly has to allocate more and more money for social sector. Thus as capitalism grows stronger, social spending also increases. This is also called Peacock-Wiseman hypothesis. This hypothesis postulates further that there is constant rise in state revenue due to economic development, which provides the government with opportunity to spend more for social sector. The government is unable to ignore the demands of people for various services, when there is an increase in revenue collection at constant rate of taxation. Although these ideas were proposed by studying European economies, this paper argues that a similar argument can be made about the case of Indian economy. After gaining independence, India adopted socialist pattern of economy which was mixed with a bit of capitalism. In 1991, due to exigencies imposed by the Gulf War 1 and the demise of USSR, India was forced by international lending agencies to adopt the policies of liberalization, privatization and globalization. Economists and sociologists warned that it would spell doom for India’s poor. All subsidies and social sector spending will vanish and an unbridled capitalism will take over. But the economic history of last 25 years indicate that Wagner’s Law and Peacock-Wiseman hypothesis replicated themselves perfectly in India. As economy and the coffers of the government grew, so did the social spending. Today India stands as a very liberalized economy and as a welfare state. This paper answers the research question: Why did the Wagner’s Law proved to be true in very different circumstances in India. This paper proposes that the democracy was the key variable which was common in Indian and European cases. It is because of electoral democracy that various parties vie with each other to offer more and more social services with increasing state revenues. This paper combines the arguments from Political Science and Economics to argue that a European economic theory can perfectly apply in an Asian case. A Massive amount of data is available about spending patterns of Indian economy. Real challenge for this paper will be to collate and analyze that data to make the argument that Wagner’s Law is applicable for Indian economy.