Human development considered as the engine of the economic growth as it improves the economy’s strength and increases the standard of living of the people, increases the choices and maximises the welfare of the society that is the prime objective of any government. The development of the human capabilities is also necessary for the sustainable growth, as there are many channels through which human development foster the economic growth. It increases the labour productivity, labour demand, employment and output. On the other hand, human capital also attracts physical capital.1 Empirically, it is very difficult to have an exact measure of human development and social welfare. Several proxies used to measure human development, e.g. GNI per capita as a measure of standard of living, Purchasing Power Parity (PPP) criterion to measure the cost of living and to measure the welfare, average year of schooling, school enrolment rate and health expenditures as a percentage of GDP to capture this composite welfare and development indicator. A fair index of Human Development Index (HDI) was developed by United Nations Development Programme in 1990. This index based on the standard of living (natural logarithm of GDP PPP per capita), access to knowledge (adult literacy rate with two-third weighting and the remaining is the gross enrolment ratio) and a healthy life (life expectancy at birth). The value of index varies from 0 to 1, lower the HDI, lesser would be the human development and welfare in the country or vice versa.

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The successive economic and financial crisis in recent time has reemphasised the importance of fiscal policy. Modern literature has also revisited the debate regarding the effectiveness of fiscal policy in influencing growth. The issue of the impact of public investment on growth is debated in economic literature since seminal work of Solow (1955). The issue is tackled from different angles. Some have used production function approach [Ligthart (2002), Otto and Voss (1994, 1996), Sturm and de Haan (1995) and Wang (2004)]. Then another seminal work by Aschauer (1989) led a series of work on this issue once again in empirical literature (1989a, 1989b). These approaches used single equation method for estimation and captured only the direct effects of public investment on growth. Periera (2000) gave another twist to this literature by highlighting the indirect effects of public investment on output through its effects on other inputs like private investment and employment. Periera’s works (1999, 2000, 2001, 2003, 2005, 2007 and 2011) also contributed empirically to this literature by using vector autoregressive (VAR) technique. This work accounts for both the direct and indirect effects of public investment on growth and also considers the feedback effects of each input to other and finally their effects on output