This study addresses an important policy issue pertaining to the determination of equalisation transfers to Indian states. It empirically estimates the effect of transfers on the expenditures of 29 Indian states using panel data methodology. It also determines transfers based on the spending needs and fiscal capacities of states. The results indicate a strong crowding-in effect of transfers on the public spending of states and the presence of the flypaper effect. Fiscal transfers relate positively to revenue expenditures in 13 out of 18 general category states and in 8 out of 11 special category states. The estimated amounts of equalisation transfers for all 29 states in four alternative scenarios, based on alternative benchmarks of fiscal capacities and spending needs, range between ₹555 billion and ₹16,048 billion. We believe these results will help policymakers and other stakeholders to design appropriate fiscal transfer strategies such that all citizens can avail a standard level of public services in India.
ACIR. (1986). Measuring state fiscal capacity: Alternative methods and their, uses (Information Reports No. M–150). Advisory Commission on Intergovernmental Relations.
2.
ACIR. (1988). State fiscal capacity and effort (Information Reports No. M–170). Advisory Commission on Intergovernmental Relations.
3.
BahlR., Martinez-VazquezJ., & SjoquistD. L. (1992). Central city-suburban fiscal disparities. Public Finance Quarterly, 20, 420–432.
4.
BlairP. (1992). Financial equalisation between local and regional authorities in European countries. Local Government Studies, 18, 7–27.
5.
BoadwayR. (1980). Intergovernmental fiscal transfers in Canada. Canadian Tax Foundation.
6.
BoadwayR. (2004). The theory and practice of equalisation. CESifo Economic Studies, 50, 211–254.
7.
BoadwayR., & FlattersF. (1991). Federal-provincial relations revisited: Consequences of recent constitutional and policy developments. In McMillanM. (Ed.), Provincial public finances: Plaudits, problems, prospects (pp. 87–121). Canadian Tax Foundation.
8.
BoadwayR., SandraR., & ShahA. (1993). The reform of fiscal systems in developing countries: A federalism perspective [Paper presentation]. Conference on fiscal reform and structural change, New Delhi.
9.
BoexJ., & Martinez-VazquezJ. (2004). Designing intergovernmental equalisation transfers with imperfect data: Concepts, practices, and lessons (Working Paper No. 04–21). Georgia State University.
10.
BradfordD. F., & OatesW. E. (1971). The analysis of revenue sharing in a new approach to collective fiscal decisions. Quarterly Journal of Economics, 85, 434–448.
11.
BuchananJ. M. (1950). Federalism and fiscal equity. American Economic Review, 40, 583–599.
12.
BuchananJ. M. (1952). Federal grants and resource allocation. Journal of Political Economy, 60, 208–217.
13.
CourcheneT. J. (1978). Avenues of adjustment: The transfer system and regional disparities. In WalkerM. (Ed.), Canadian confederation at the crossroads: The search for federal-provincial balance (pp. 145–186). The Fraser Institute.
HierroL., AtienzaP., & PatiñoD. (2007). Inequality and progressiveness in the distribution of revenues of the states in federal countries: A comparative study (Working Paper No. 07–03). Andrew Young School of Policy Studies, Georgia State University.
16.
HofmanB., & Cordeira GuerraS. (2005). Fiscal disparities in East Asia: How large and do they matter? In World Bank (Ed.), East Asia decentralizes: Making local government work (pp. 67–83). The World Bank.
17.
LaddH. F. (1994). Measuring disparities in the fiscal condition of local governments. In AndersonJ. E. (Eds.), Fiscal equalisation for state and local government finance (pp. 21–54). Praeger.
18.
LaddH., & YingerJ. (1994). The case of equalisation aid. National Tax Journal, 47, 211–224.
19.
LalvaniM. (2002). Flypaper effect: Evidence from India. Public Budgeting & Finance, 22(3), 67–88.
20.
MaY. (1997). Intergovernmental fiscal transfers in nine countries: Lessons for developing countries (Policy Research Working Paper No. WP 1822). World Bank.
21.
MaartenA., & LewisJ. (2011). Equalizing spending needs of sub-national governments in a developing country: The case of Tanzania. Environment and Planning: Government and Policy, 29, 487–501.
22.
Martínez-VázquezJ., & BoexJ. (1999). Fiscal decentralization in the Russian federation during the transition (Working Paper No. 3). Andrew Young School of Policy Studies, Georgia State University.
23.
Martínez-VázquezJ., & SearleB. (2007). Fiscal equalisation: challenges in the design of intergovernmental transfers. Springer Science & Business Media.
24.
MunozA. F., RadicsG. X., & BoneC. (2016). Sub-national fiscal disparities and intergovernmental transfers in LAC. Review of Public Economics, 219(4), 35–66.
25.
MusgraveR. (1959). Theory of public finance: A study in public economy. McGraw-Hill.
26.
OatesW. E. (1972). Fiscal federalism. Harcourt Brace Jovanovich Inc.
27.
OatesW. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37(3), 1120–1149.
28.
OECD. (2014). Fiscal federalism: Making decentralization work.
29.
PandaP. K. (2015). Fly-paper effect of fiscal transfers in India: A dynamic panel analysis. The Empirical Econometrics and Quantitative Economics Letters, 4(2), 69–79.
30.
PandaP. K. (2017). Budgetary impacts of central fiscal transfers in India: Evidence from state level data. VISION: Journal of Indian Taxation, 4(2), 20–38.
31.
PandaP. K., & NirmalaV. (2013). Central fiscal transfers and states’ spending in India: An analysis of incentive effect. Economics Bulletin, 33(2), 1229–1246.
32.
RangarajanC., & SrivastavaD. K. (2004). Fiscal transfers in Australia: Review and relevance to India. Economic and Political Weekly, 39, 3709–3722.
33.
RidgeM. (1992). Local government finance and equalisation: the case of Ireland. Fiscal Studies, 13, 54–73.
34.
RuggeriG., & YuW. (2000). Federal fiscal balances and redistribution in Canada: 1992–1997. Canadian Tax Journal, 48(3), 626–655.
35.
SarafR., & SrivastavaD. K. (2009). Determining general and specific purpose transfers: An integrated approach (Working Paper No. 40). Madras School of Economic.
36.
ScottA. D. (1952). Federal grants and resource allocation. Journal of Political Economy, 60, 534–538.
37.
ShahA. (1988). Capitalization and the theory of local public finance: An interpretive essay. Journal of Economic Surveys, 2(3), 209–243.
38.
ShahA. (1994). A fiscal needs approach to equalisation transfers in a decentralized federation (Policy Research Working Paper No. 1289). World Bank.
39.
SpahnP. (2007). Equity and efficiency aspects of interagency transfers in a multi-government framework. In BoadwayR. & ShahA. (Eds.), Intergovernmental fiscal transfers-principles and practice. The World Bank.
40.
TieboutC. M. (1956). A pure theory of local expenditures. Journal of Political Economy, 64(5),416–424.
VaillancourtF., & BirdR. (2007). The interregional incidence of central budgets in federation: Some evidence from Canada. Public Budgeting and Finance, 27(1), 1–19.
