Abstract. The study investigates causal relationship between expenditure on education and economic growth in India form the period 1951 to 2012. The econometric approach of the paper is based on the bivariate VAR model, co-integration, granger causality, variance decomposition and impulse response. The vector error correction result revels long run equilibrium relationship exists between expenditure on education and economic growth while only a unidirectional causality runs from expenditure on education to economic growth in India. Shocks due to expenditure on its own is positive throughout the tenth period and one unit standard deviation shock have positive impact on economic growth up to 10th periods while no significant impact is witnessed economic growth to expenditure on education. The study arrives it policy implication that the government has to focus more on expenditure in education in order to create better human development which can have better contribution to economic growth.

Keywords: education expenditure, economic growth, VECM, Impulse response, granger causality.