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Nexus Between Revenue and Expenditure of Central Government and Implications on Sustainability of Fiscal Policy

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  • B M Misra
  • J K Khundrakpam

Abstract

The large dose of fiscal stimulus measures undertaken by the Central Government to counter economic slowdown emanating from global financial crisis since the second half of 2008-09 led to rapid deterioration in its finances. This paper thus analyzes the nexus between receipts and expenditure to investigate whether the sustainability conditions of Central Government finances have been violated or not. This is carried out using the ARDL approach to cointegrate analysis on quarterly data for the period 1996-97:1 to 2008-09:4. The analysis was carried out on two sample periods viz.—1) 1996-97:1 to 2007-08:4 and 2) 1996-97:1 to 2008-09:4 in order to ascertain whether developments during 2008-09 altered the sustainability conditions or not. It is found that during 1996-97:1 to 2007-08:4, revenue and expenditure shared a stable long-run relationship indicating sustainability of Central Government finances. One percent increase in revenue leads to less than 1% increase in expenditure, indicating fiscal deficit and debt would narrow down in the long-run. The developments during 2008-09, however, completely altered sustainability conditions. No conclusive evidence of a stable long-run relationship between expenditure and revenue receipts was found. One percent increase in revenue receipts appears to lead to more than 1% increase in expenditure, implying rising fiscal deficit and debt.

Suggested Citation

  • B M Misra & J K Khundrakpam, 2010. "Nexus Between Revenue and Expenditure of Central Government and Implications on Sustainability of Fiscal Policy," The IUP Journal of Public Finance, IUP Publications, vol. 0(3), pages 36-48, August.
    • Handle: RePEc:icf:icfjpf:v:08:y:2010:i:3:p:36-48
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