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Central Fiscal Transfers and States' Spending In India: An Analysis of Incentive Effect

Author

Listed:
  • Prasant Kumar Panda

    (Tagore Arts College (Affiliated to Pondicherry University), INDIA)

  • Velan Nirmala

    (Pondicherry University)

Abstract

The paper examines the incentive effects of federal fiscal transfers on states' spending in India. To this end, a panel data set for 22 states for the period 1980-81 to 2004-05 is used; and fixed and random effect panel regression models are employed. Per capita resource transfers in channel specific and in aggregate terms from the Centre are found to be significant and positively associated with states' aggregate expenditure, revenue expenditure and capital disbursements in per capita terms. The ratio of revenue expenditure to own revenue receipts of states in percent is also significant and positively related to per capita resource transfer. Further, the results validate fly paper effect in Indian context. The findings suggest that central transfers not only have stimulatory effect on states' spending but also they have disincentives on expenditure economy of states. The paper calls for reexamining the design of transfers and the ratio of lump-sum transfers to specific purpose transfers in order to address the adverse incentives.

Suggested Citation

  • Prasant Kumar Panda & Velan Nirmala, 2013. "Central Fiscal Transfers and States' Spending In India: An Analysis of Incentive Effect," Economics Bulletin, AccessEcon, vol. 33(2), pages 1229-1246.
    • Handle: RePEc:ebl:ecbull:eb-13-00070
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    References listed on IDEAS

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    Cited by:

    1. Suraj BADAIK, 2017. "Impact of fiscal responsibility legislations on state finances in India," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(3(612), A), pages 115-124, Autumn.
    2. K. Shanmugam & K. R. Shanmugam, 2022. "Equalisation Transfers Based on Spending Needs and Fiscal Capacity of State Governments in India," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 16(2), pages 139-165, May.
    3. Asharani Samal, 2020. "An Empirical Analysis of Asymmetry and Threshold Effect of Intergovernmental Grants in India: A Panel Data Analysis," Global Business Review, International Management Institute, vol. 21(2), pages 458-472, April.

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    More about this item

    Keywords

    Federal transfers; States' spending; Incentive effects; Allocative effect; Fly Paper effect; Panel data models;
    All these keywords.

    JEL classification:

    • H0 - Public Economics - - General
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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