The Cointegration and Causality between Tax Revenue and Economic Growth in India

Abstract:     
In any country, developed or less developed, mobilization of resources constitutes an important aspect of achieving a higher level of economic growth. And, as a source of resource mobilization, the role of tax revenue is very significant in developing countries like India. Thus, this paper is an attempt to investigate the long-run relationship between the tax revenue and economic growth in India. Over a relatively long sample period spanning from 1950-51 to 2008-09, the study applies the Johansen’s cointegration test and vector error correction model to serve the purpose. The empirical analysis provides the evidence of long-run equilibrium relationship as well as feedback causality between the total tax revenue and the economic growth in India. Therefore, the outlook is that the economists and policy makers should suggests an ideal, efficient and buoyant tax system so that gross tax revenue of the government would increase substantially thereby leading to optimum mobilization of resources for higher economic growth of the country.

Keywords: India, Tax Revenue, GDP, Economic Growth, Cointegration, Error Correction Model, Granger Causality

JEL Classification: C22, C32, E62

Accepted Paper Series