Does government revenue converge across Indian states? Evidence from club convergence

ABSTRACT

While the bulk of the studies in India examine the convergence of per-capita income or expenditures, we investigate whether there is any evidence of convergence of government revenues and its various compositions by focusing a panel of 22 Indian states for the periods 1980–81 to 2014–15. To answer this question, the present study employs Phillips and Sul panel club convergence technique. The results find evidence of a single club convergence in the case of total revenues and revenues collected in the revenue account. Further, our results also reveal the presence of three-club convergence when we disaggregate the gross revenues into capital receipts and state-owned tax-revenue. From the policy perspective, it is important for the Central government to integrate all states in revenues collection through tax devolution formula and grants-in-aid.

KEYWORDS:

• Total revenues
• revenue receipts
• capital receipts
• state-owned tax-revenue
• club convergence

JEL CLASSIFICATION:

• H20
• C33

Acknowledgments

The authors gratefully acknowledge the valuable suggestions received from the editor and anonymous referees in the earlier draft of this paper. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Horizontal equity refers fiscal equality among the states.

² The detailed methodology can be found in Phillips and Sul (2007).

³ The speed of convergence is estimated through $b$, specifically $b=2\alpha$.