Abstract: The purpose of this paper is to examine the interrelationship between government expenditure and tax revenue for India. These variables are important from a policy point of view, especially for a country like India, which is suffering from persistent budget deficits. Although a number of studies have shed light on this issue using Granger causality tests, the present study attempts to quantify various feedback between revenue and expenditure in Indian context. The findings of this paper should allow policy makers to make informed decisions. The unit-root test and Granger causality test are used to conduct the empirical analysis. The Granger’s test suggests unidirectional causality flowing from tax revenues to total expenditure of the government. The outcome of the Granger test was found to be sensitive to the number of lags introduced in the model. To conclude, from the perspective of policy making and the deficit solution debate, raising taxes in India is perhaps the optimal solution to the current budget deficit predicament.
Keywords: Government Expenditure, Tax Revenue, Granger causality test, Dickey-fuller test.
Title: Government Expenditure and Tax Revenues: Testing for Causality in India
Author: Aastha Jain
International Journal of Social Science and Humanities Research
ISSN 2348-3164 (online), ISSN 2348-3156 (Print)
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