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Equalization Transfers Based On Spending Needs and Fiscal Capacity of State Governments in India

Author

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  • K. R. Shanmugam

    ((Corresponding Author)Director and Professor, Madras School of Economics)

  • K. Shanmugam

    (Chief Secretary of Government of Tamil Nadu and Senior Research Fellow of Madras School of Economics)

Abstract

This study addresses an important policy issue pertaining to determination of equalization transfers to Indian States. It empirically estimates the effect of transfers on expenditures of 29 Indian States using the panel data methodology. It also determines the transfers based on the spending needs and fiscal capacity of States. Results indicate a strong crowding-in effect of transfers on public spending of States and the presence of fly paper effect. The fiscal transfers positively relate to revenue expenditures in 13 out of 18 General Category States and 8 out of 11 Special Category States. Amounts of equalization transfers determined for all 29 States in four alternative scenarios range between ₹. 555 billion and ₹.16048 billion. We hope that these results will be useful to policymakers and other stakeholders to take appropriate strategies to design fiscal transfer policy such that all citizens can avail a standard level of public services in India.

Suggested Citation

  • K. R. Shanmugam & K. Shanmugam, 2022. "Equalization Transfers Based On Spending Needs and Fiscal Capacity of State Governments in India," Working Papers 2022-238, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2022-238
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    References listed on IDEAS

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    1. Wei-Liang Zhang & Li-Ying Song & Muhammad Ilyas, 2023. "Can the digital economy promote fiscal effort?: Empirical evidence from Chinese cities," Economic Change and Restructuring, Springer, vol. 56(5), pages 3501-3525, October.

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    More about this item

    Keywords

    Fiscal Fiscal Transfers; Fiscal Equalization; Expenditure Needs; Fiscal Capacity; Indian States; Panel Data Methods;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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