A Causality Analysis onTax-Growth Nexus in India: 1950-51 to 2011-12

DR. SARBAPRIYA RAY, Dr. Mihir Pal, Prof Ishita AdityaRay



In the context of taxes-growth nexus, there is a variety of studies to find out the association between economic growth via GDP growth and tax rates. . However, theoretical investigation on the effect of fiscal policy on economic growth is till now indecisive, rather debatable. This paper attempts to enquire into the fact econometrically whether taxation revenue collected in different form is a cause of India’s economic growth in the long run. More specifically, the article tries to find the causal relationship between taxation revenue and economic growth in India. Long-run equilibrium relationship between economic growth and taxation can be inferred in the case of India since Johansen cointegration test confirms the existence of any long run equilibrium relationship between taxation and economic growth (real GDP growth). Pair-wise granger causality test confirms that the direction of causality between economic growth (via GDP growth) and total tax revenue, economic growth and indirect tax are generally bidirectional (causality runs in both directions) which implies that higher level of indirect tax revenue as well as total revenue will foster real economic growth but no significant causal relationship exists between economic growth and direct taxes in any direction.  Error correction results show that the error correction term has the correct negative sign and is significant for GDP but insignificant for direct taxes, indirect taxes and total tax revenue. This finding is very crucial for Indian economy as India is largely dependent on large indirect tax revenue for implementing different planned welfare activities as well as to finance essential public expenditure and make economic policies successful. 



Keywords: Taxation, growth, long-run relationship, granger causality, cointegration, India.

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