Sp issue on 16th Fin Commission-Wl-5212-An Alternative Approach for Projecting Own Tax Revenue of the Indian States

Finance Commissions undertake an exercise in forecasting revenues and expenditures of states for an assessment of their fiscal needs. Commissions in the past have used alternative assumptions on buoyancy of tax revenues and tax-GSDP ratio to differentiate among states and incentivise improvements in fiscal performance. We propose an alternative approach to forecast tax revenues of the states by using a time-invariant stochastic frontier model. Under different specifications of the SFA model, the overall tax buoyancy of the states remained consistent and rank of the states in efficiency are stable, indicating that the results are robust.