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Indian Fiscal Federalism and Resource Gap of State Governments: Measurement and Analysis

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  • J. S. Darshini
  • K. Gayithri

Abstract

This article examines the various forms of basic resource gap (BRG) and fiscal dependency in a long-term panel framework, comprising 14 major Indian states from 1981–82 to 2016–17. Further, it decomposes the level and extent of states’ fiscal dependence on transfers and borrowings, which together constitute the total non-own source of revenue on a disaggregated level into three different phases to gain a thorough understanding of the states’ vulnerability and the quality of dependence. The findings show that among the 14 states, Odisha, Karnataka, Tamil Nadu and Uttar Pradesh are leading the way in reducing the BRG during the third sub-period. Odisha’s fiscal dependency has decreased faster and has been sustained to a greater extent than in the other states. In contrast, the accumulation of unsustainably higher levels of debt and guarantees is an issue of concern in West Bengal, Punjab and Kerala, where discretionary sources of revenue have increased significantly in recent decades. The study finds that, despite several incentive-based reform measures, the BRG persists, with mounting fiscal challenges besides a decline in non-debt capital receipts across the Indian states.

Suggested Citation

  • J. S. Darshini & K. Gayithri, 2024. "Indian Fiscal Federalism and Resource Gap of State Governments: Measurement and Analysis," Review of Development and Change, , vol. 29(1), pages 44-66, June.
    • Handle: RePEc:sae:revdev:v:29:y:2024:i:1:p:44-66
    DOI: 10.1177/09722661241260627
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    References listed on IDEAS

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    1. Khemani, Stuti, 2007. "Does delegation of fiscal policy to an independent agency make a difference? Evidence from intergovernmental transfers in India," Journal of Development Economics, Elsevier, vol. 82(2), pages 464-484, March.
    2. Chakraborty, Pinaki & Mukherjee, Anit K. & Amar Nath, H.K., 2010. "Interstate distribution of central expenditure and subsidies," Working Papers 10/66, National Institute of Public Finance and Policy.
    3. Rao, C. Bhujanga & Srivastava, D.K., 2014. "Dependence of States on Central Transfers: State-wise Analysis," Working Papers 14/137, National Institute of Public Finance and Policy.
    4. R. K. Pattnaik, 2019. "Indian fiscal federalism: a study of factors affecting resource position of the state governments," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(2), pages 191-211, December.
    5. Rao, Govinda & Shah, Anwar, 2009. "States' Fiscal Management and Regional Equity: An Overview," OUP Catalogue, Oxford University Press, number 9780195698794.
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