Research Paper No. 656

TAX SMOOTHING IN A FINANCIALLY REPRESSED ECONOMY: EVIDENCE FROM INDIA

by

Paul Cashin, Nilss Olekalns & Ratna Sahay

October 1998

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

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 1966-97. 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 fiancial repression, which has led to the accumulation of excessive public liabilities.
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