Tax Smoothing in a Financially Repressed Economy: Evidence from India

ByPaul Cashin, Nilss Olekalns, Ratna Sahay

August 1, 1998

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

India has a long history of running fiscal deficits. Two broad considerations motivate a government to run a deficit: tax smoothing and tax tilting. This paper tests a version of Barro’s tax-smoothing model, using Indian data for the period 1951-52 to 1996-97. The empirical results indicate that the central government of India has tax-smoothed, while the regional governments of India have not. The paper also finds evidence of tax tilting, reflected in financial repression, which has led to the accumulation of excessive public liabilities.

Subject: Budget planning and preparation, Expenditure, Financial institutions, Fiscal policy, Government debt management, Public financial management (PFM), Stocks

Keywords: Budget planning and preparation, budget surplus, central government, financial repression, fiscal policy, fiscal surplus, Government debt management, government spending, India, North America, Stocks, surplus granger, Tax smoothing, tax-smoothing hypothesis, tax-smoothing model, tax-smoothing surplus, tax-Smoothing surplus, WP

Pages:
43
Volume:
1998
DOI:
https://doi.org/10.5089/9781451854466.001
Issue:
122
Series:
Working Paper No. 1998/122
Stock No:
WPIEA1221998
ISBN:
9781451854466
ISSN:
1018-5941

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