A Causal Test of Fiscal Synchronisation Hypothesis in India

Using the annual data from 1960-61 to 1996-97, this paper attempts to test the causal nexus between total central government expenditures and total central government revenues in the case of India, within the empirical framework of causality, cointegration and error correction mechanism in the presence of a structural break. Identifying a structural break in both budget expenditures and revenues around the period 1990-91, this study finds support for a long-run equilibrium relationship between budget expenditures and revenues. Furthermore, this study finds evidences of a unidirectional causality from expenditure to revenue thereby invalidating the fiscal synchronisation hypothesis in India during the study period.