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Knowledge capital formation through investment in education has been at the center of the recent economic planning and management. Increase in labor productivity and technological innovation is the outcome of Research and Development (R&D) which is a part of the higher education system of a country. Therefore, to achieve long-run sustainable growth, an economy should dynamize its higher education framework along with strengthening the primary and secondary education to reflect the changing realities. The study examines the interplay between the percentage of educational expenditure in total expenditure and per capita net state domestic product (NSDP) of eight selected metro city states of India during the period 2005–2006 to 2015–2016. The result shows strong positive impact of educational expenditure on per capita NSDP. Therefore, the study suggests to increase the percentage share of educational expenditure in total expenditure.