An Econometric Analysis of Revenue Diversification Among Selected Indian States

Abstract

The key objective of this article is to empirically examine the trends and determinants of revenue diversification with respect to 14 major Indian states. The findings highlight a gradual decrease in the level of revenue diversification, which has become more visible in recent years. This indicates an erratic pattern of growth in tax and non-tax revenue sources. The panel cross-sectional–autoregressive distributed lag model test results reveal a positive contribution of economic and institutional factors, as compared to political factors, toward the process of revenue diversification. Overall, it is evident that cyclical fluctuations in the major tax revenue sources, coupled with a lessened emphasis on rationalising the structure of non-tax revenue sources, seem to have had an adverse impact on the process of revenue diversification on the part of states. JEL Classifications: H0, H1, H2, H7