Summary: The study examines the empirical relationship between public primary, secondary and tertiary education expenditure and economic growth of India using time series econometric analysis for the time period 1951-2011. The econometric analysis indicates that all the sectoral education expenditures positively affect GDP growth from 1980 onwards when the country started to shift from a state-led growth model towards a pro-business regime. We argue that the labour market characteristics and the institutional structure were responsible for the lack of effectiveness of education spending prior to 1980s. Before the 1980s, the public sector was the principal operator in the Indian economy, private sector participation was minimal and bureaucratic jobs were the most attractive jobs which were unproductive and highly rent-seeking. Such a situation discouraged proper utilisation of the skilled work force and hence the education expenditure did not exhibit the desired growth effects. With the onset of reforms, industrial and service sectors expanded creating more job opportunities and thus there was better utilisation of the educated labour pool. As a result, the effect of education expenditure started to be felt as the human capital was put to better use.