Emerging trends in fiscal transfer systems in selected federations: implications for India

The chapter evaluates possible options for reforming the Indian transfer system in the context of lessons learnt internationally from large federations. In the light of the international experience the chapter explores several issues which can help graduate India’s federal setup towards a mature federal system like that of Australia, Canada and several such countries including the OECD countries. India’s federal system in the last few decades has tried to evolve despite challenges. However, there have been several developments that have strengthened the argument that the Indian system can progress towards a more advanced federal system only if it carefully calibrates and modernizes its devolution formula as well as estimation and forecasting procedures. In addition, it needs to identify and separate devolution and redistribution objectives from tax sharing with the states, be selective in specific purpose transfers and consolidate them for better outcomes, consider the wider use of performance-based grants and increase the effectiveness of conditional transfers by carrying out an in-depth evaluation of the most important centrally sponsored schemes.