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The Political Economy of the Revenue Deficit


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  • Goyal, Ashima


A widely accepted hypothesis is that concessions demanded by and granted to vested interests are responsible for the steady decline in the government financial position. We argue that it was rather the supply-side shocks of the seventies combined with the political objective of protecting the poor that were responsible. We support our argument by examining time series of disaggregated government budget data, and the theory of incentives under imperfect information. The latter suggests that price controls in the presence of cost shocks would lead to systematic incentives to lower quality and investment. And therefore lower tax capacity and the ability to reduce poverty in the future. We illustrate these mechanisms at work in power, telecommunications, railways, roads, education, and tax collection. The analysis is hopeful, however, because if this causal mechanism were understood, a concerted attempt to rationalise user charges and improve quality would be more acceptable. The process would be helped by macroeconomic policies that keep interest rates low and prevent exchange rate volatility, while supply side policies keep inflation low.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29980.

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Date of creation: 1999
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Handle: RePEc:pra:mprapa:29980

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Keywords: cost shocks; user charges; public goods; quality; deficits;

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  1. Ashima Goyal, 2006. "Transitional Exchange Rate Policy In A Low Per Capita Income Country," The IUP Journal of Monetary Economics, IUP Publications, IUP Publications, vol. 0(3), pages 37-56, August.
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Cited by:
  1. Goyal, Ashima, 2003. "Budgetary processes: a political economy perspective," MPRA Paper 27786, University Library of Munich, Germany.
  2. Ashima Goyal, 2010. "Exchange Rate Regimes and Macroeconomic Performance in South Asia," Macroeconomics Working Papers 22779, East Asian Bureau of Economic Research.
  3. Ashima Goyal, 2013. "Sustaining growth: Interests versus institutions," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2013-001, Indira Gandhi Institute of Development Research, Mumbai, India.
  4. Ashima Goyal & A. K. Jha, 2005. "Dictatorship, Democracy and Institutions: Macropolicy in China and India," Working Papers id:264, eSocialSciences.
  5. Ashima Goyal, 2007. "Governance in India’s Public Transport Systems - Comparing Indian Railways and Airlines," Microeconomics Working Papers 22402, East Asian Bureau of Economic Research.
  6. Ashima Goyal, 2007. "Governance in India's public transport systems: Comparing Indian railways and airlines," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2007-019, Indira Gandhi Institute of Development Research, Mumbai, India.
  7. Goyal, Ashima & Paul, Manas, 2004. "Interest groups or incentives: the political economy of fiscal decay," MPRA Paper 29198, University Library of Munich, Germany.
  8. Sivakumar, Marimuthu & Venkatesh, K & Ayyasamy, M, 2001. "India’s Revenue Deficit: A Challenge Ahead," MPRA Paper 34696, University Library of Munich, Germany.


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