Chakraborty, Lekha S and Sinha, Darshy (2008): Budgetary Forecasting in India: Partitioning Errors and Testing for Rational Expectations.
Download (195Kb) | Preview
According to the theory of efficient markets, economic agents use all available information to form rational expectations. Fiscal marksmanship, the accuracy of budgetary forecasting, can be one important piece of such information the rational agents must consider in forming expectations. Using Theil’s inequality coefficient (U) based on the mean square prediction error, the paper estimates the magnitude of errors in the budgetary forecasts in India for the period 1990-91 to 2003-04 and also decomposed the errors into biasedness, unequal variation and random components to analyze the source of error. The test of rational expectations revealed that neither revenue nor expenditure forecasts in India is rational. However, capital budget revealed more forecast errors than revenue budget. The results also revealed that degree of errors in forecasting of receipts was relatively higher than that of expenditure. However there is no specific trend in the forecasting errors, which reveals that budgetary estimates are made not based on adaptive expectations. The proportion of error due to random variation has been significantly higher (which is beyond the control of the forecaster), while the errors due to bias has been negligible. The analysis related to efficiency of forecasts also showed that no significant improvement in forecasts over time.
|Item Type:||MPRA Paper|
|Original Title:||Budgetary Forecasting in India: Partitioning Errors and Testing for Rational Expectations|
|Keywords:||fiscal marksmanship, Theils’ inequality coefficient, rational expectations, budgetary forecast errors|
|Subjects:||E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy
H - Public Economics > H6 - National Budget, Deficit, and Debt > H68 - Forecasts of Budgets, Deficits, and Debt
|Depositing User:||Lekha S Chakraborty|
|Date Deposited:||10. Mar 2008 12:19|
|Last Modified:||01. Mar 2013 06:51|
Allan, C M (1965): “Fiscal marksmanship, 1951-63’, Oxford Economic Papers, 17(2), pp. 317-327 Asher, M G (1978): ‘Accuracy of Budgetary Forecasts of Central Government, 1967-68 to 1975-76’, Economic and Political Weekly, Vol 13, No.8. Blinder, A S and Solow, R M (1974): ‘Analytical Foundations of Fiscal Policy”, in ‘The Economics of Public Finance’, Washington D C, Brookings, pp 3-115. Bhattacharya, B B and Kumari, Anita (1988): ‘Budget Forecasts of Central Government Revenue and Expenditure: A test of Rational Expectation”, Economic and Political weekly, June 25, 1988, pp 1323-1327. And in Ghosal, A (1989): Artificial Intelligence and Applied Cybernetics, SCIMA Special Series on International Congress of Cybernetics and Systems. Chakrabarty T K and Varghese Wilson (1982): ‘ Government of India’s Budget Estimation: An Analysis of the Error Components’, Vol. 3, No 2, RBI Occasional papers, pp-175-190 Davis, J M ‘ Fiscal marksmanship in the United Kingdom, 1951-78’, The Manchester school of Economic and Social Studies, XL VIII, pp. 187-202 L XXVI, pp 110-124 Lovell, M C (1986): ‘ Tests of the Rational Expectations Hypothesis’, The American Economic Review Morrison, R J (1986): ‘Fiscal marksmanship in the United States: 1950-83’, The Manchester school of Economic and Social Studies, L IV, pp. 322-333 Muth, J F (1961): ‘ Rational Expectations and the theory of Price Movements’, Econometrica, Journal of the Econometric Society, 29, pp 315-335 Pindyck, R.S. and Rubinfeld, D L (1998): ‘Economic Models and Economic Forecasts’, (Fourth Edition), McGraw-Hill International Editions, Economic Series Prest, A.R (1975): ‘Public Finance in Developing Countries’, London, Weidenfeld and Nicolson. Srivastava, D K (1975): ‘ On Forecasting Non-Corporate Income Tax Revenues in India’, Public Finance/Finances Publiques’, No 3, XXX/XXXeme Annee, pp 428-444 Theil, H (1958): ‘Economic Forecasts and Policy’, Amsterdam, North Holland. Theil, H (1966): ‘Applied Economic Forecasting’, Amsterdam, North Holland.