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Equalisation Transfers Based on Spending Needs and Fiscal Capacity of State Governments in India

Author

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  • K. Shanmugam

    (K. Shanmugam is a Research Scholar, Madras School of Economics, India. He is retired Chief Secretary of Government of Tamil Nadu. E-mail: shanmugamka1960@gmail.com)

  • K. R. Shanmugam

    (K. R. Shanmugam (corresponding author) is Director and Professor, Madras School of Economics, India.)

Abstract

This study addresses an important policy issue pertaining to the determination of equalisation transfers to Indian states. It empirically estimates the effect of transfers on the expenditures of 29 Indian states using panel data methodology. It also determines transfers based on the spending needs and fiscal capacities of states. The results indicate a strong crowding-in effect of transfers on the public spending of states and the presence of the flypaper effect. Fiscal transfers relate positively to revenue expenditures in 13 out of 18 general category states and in 8 out of 11 special category states. The estimated amounts of equalisation transfers for all 29 states in four alternative scenarios, based on alternative benchmarks of fiscal capacities and spending needs, range between ₹555 billion and ₹16,048 billion. We believe these results will help policymakers and other stakeholders to design appropriate fiscal transfer strategies such that all citizens can avail a standard level of public services in India. JEL Codes: H77, H73, H72, C23

Suggested Citation

  • 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.
    • Handle: RePEc:sae:mareco:v:16:y:2022:i:2:p:139-165
    DOI: 10.1177/09738010221074595
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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 Transfers; Fiscal Equalisation; 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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