Study claims Indian states follow a flawed ‘spend-tax’ model to overcome fiscal issues

By Jag Jivan

A new study analyzing the revenue-expenditure nexus of Indian states has revealed that state government spending drives tax revenue growth, supporting the ‘spend-tax’ hypothesis. Conducted by researchers Himani Baxi and Dhyani Mehta from Pandit Deendayal Energy University, the study used a panel Autoregressive Distributed Lag (ARDL) approach -- statistical technique used to analyze the long-term relationship between variables -- to examine fiscal trends across 29 Indian states from 1990 to 2022.

The research found that state expenditure positively impacts tax revenue in both the short and long run. A 10% increase in state spending leads to a 1% rise in tax revenue in the short term and an 1.8% increase in the long term. Additionally, state GDP growth significantly boosts tax revenue, with a 10% rise in GDP resulting in a tax revenue increase of 8% over the long term.

The findings challenge conventional fiscal theories that suggest taxation should determine spending. Instead, Indian states appear to spend first and then generate tax revenue to match expenditure needs. This contrasts with studies in other countries, where the tax-spend or fiscal synchronization models are more commonly observed.

However, the study highlights concerns over states’ growing dependence on central government tax transfers, which may weaken fiscal autonomy. It suggests that states should explore alternative revenue sources, such as non-tax revenues, and focus on efficient public service pricing to reduce dependency on central funds.

With rising infrastructure costs and the reintroduction of old pension schemes, the Reserve Bank of India has warned that controlling fiscal deficits will be increasingly difficult. The study emphasizes the need for a re-evaluation of fiscal decentralization policies to ensure sustainable state finances.

The research has been published in the International Journal of Social Economics and is expected to influence future discussions on state-level fiscal policies in India.

Gharapuri's discoveries: India finds a maritime past, ASI an app

By Gajanan Khergamker The Archaeological Survey of India (ASI) has once again demonstrated an extraordinary talent for mistaking administrative housekeeping for institutional achievement. At the very moment excavations at Gharapuri are yielding evidence that could fundamentally reshape our understanding of India's maritime past, the institution has chosen to celebrate the rollout of QR-enabled audio guides and GPS-supported navigation at its monuments. The contrast could not be starker.

What's behind Columbia's president-elect speaking out against continuing the country’s peace agenda

By Laura Violeta Devia López There are just over three weeks left before Abelardo De La Espriella takes office as Colombia’s new president, despite the numerous allegations that cast a shadow over his election and, as usual, discredit the Colombian electoral system. The announcements already being made by Abelardo and his designated cabinet mark a significant change of course, not only for the Colombian people but also for the country’s place in the world.

Small Farm, big success: How an innovative couple built a model of sustainable farming

By Bharat Dogra In Sema, a remote village in Rajasthan's Rajsamand district, Bhagwati Lal and his wife Rekha share equal credit for creating a remarkable farm that has become an inspiration for villagers and visitors alike. Their achievement demonstrates how even a very small piece of land can provide a strong foundation for sustainable livelihoods while enhancing climate resilience and protecting the environment.

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