Central Government Revenue and Expenditure Relationship in the Economy of India: An Econometric Study

The relation between government revenue and expenditure in any country has been exciting the imagination and interest of economists. This paper is devoted to enquire into the underlying fiscal adjustment process through expenditure and revenue of the Government of India over the period 1971 to 2008. Test of stationarity of the variables, and study of cointegration are followed by Error Correction Model and tests of Granger causality through the estimation of appropriate unrestricted Vector Auroregression (VAR) model. Johansen cointegration tests testified for the absence of long-run relationship between the variables over the period 1971-2008, indicating the Doctrine of Fiscal Neutrality. However, the historical dataset is marked by the presence of two sub-periods comprising 1971-1979 and 1980-2008 implying structural shift in the process of fiscal administration. No cointegration has been found in the sub-period 1971-1979. Accordingly, the Doctrine of Fiscal Neutrality appeared to hold good in the first sub-period. On the other hand, cointegrating relation is established in the second sub-period 1980-2008. Estimation of appropriate unrestricted VAR model for this period testifies for the bi-directional Granger causality between expenditure and revenue which upholds the Fiscal Synchronization Doctrine as advocated by Musgrave (1969), and Meltzer and Richard (1981).