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Indian fiscal federalism: a study of factors affecting resource position of the state governments

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  • R. K. Pattnaik

    (SPJIMR)

Abstract

The finances of state governments in India have been facing a hard budget constraint as there is a legislative mandate to run the finances with a ceiling on fiscal deficit at 3% of gross state domestic product (GSDP) and the debt-to-GSDP ratio at 20%. In this paper, we have elucidated the limitations of fiscal deficit as the sole target, particularly in the context of availability of resources to the state budgets. These include: (a) tax devolution and grants based on finance commission awards, (b) discretionary transfers in terms of grants from the union government and (c) borrowings from the market. . Keeping in view the constitutional and institutional flow of resources to the state budget, a resource gap model has been designed in this paper. This is named as Basic Resource Gap (BRG) with three variants (BRG 1, BRG 2 and BRG 3). Based on the BRG, fiscal dependency ratio (FDR) and fiscal stress ratio (FSR) have been worked out in this paper. The empirical findings broadly suggest that in respect of the consolidated position (all states together) nearly 50% of the total resource originated from the dependent and stressed sources. A further breakup of this reveals that while resources from dependent sources were 22%, the resources from stressed source were 28% of the total available resources. This analysis is an analytical improvement over the conventional approach of fiscal deficit. BRG model, besides filling the gap in the literature of fiscal federalism, will be operationally helpful to the state governments in terms of a holistic picture of the resource gap incorporating the constitutional and institutional resource flows to the state budgets based on the accounting arrangements in conformity with consolidated fund and public accounts. In essence, BRG along with FSR and FDR will add analytical rigor to the analysis of hard budget constraints in terms of resource availability to the state governments.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:jsecdv:v:21:y:2019:i:2:d:10.1007_s40847-019-00087-9
    DOI: 10.1007/s40847-019-00087-9
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    References listed on IDEAS

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    1. Blejer, Mario I & Cheasty, Adrienne, 1991. "The Measurement of Fiscal Deficits: Analytical and Methodological Issues," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1644-1678, December.
    2. Pinaki Chakraborty, 2017. "Federalism, fiscal space, and public investment spending: do fiscal rules impose hard-budget constraints?," Chapters, in: Naoyuki Yoshino & Peter J. Morgan (ed.), Central and Local Government Relations in Asia, chapter 3, pages 103-129, Edward Elgar Publishing.
    3. Rajaraman, Indira, 2008. "The Political Economy of the Indian Fiscal Federation," India Policy Forum, National Council of Applied Economic Research, vol. 4(1), pages 1-51.
    4. Darshini J S & K Gayithri, 2019. "Fiscal dependency of States in India," Working Papers 433, Institute for Social and Economic Change, Bangalore.
    5. Rao, M. Govinda, 2017. "The Effect of Intergovernmental Transfers on Public Services in India," Working Papers 17/218, National Institute of Public Finance and Policy.
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    More about this item

    Keywords

    Fiscal deficit; Fiscal federalism; Basic Resource Gap; Fiscal dependency; Fiscal stress; Financial market;
    All these keywords.

    JEL classification:

    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H68 - Public Economics - - National Budget, Deficit, and Debt - - - Forecasts of Budgets, Deficits, and Debt
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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