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Federal Transfers and Fiscal Discipline in India

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  • Antra Bhatt
  • Pasquale Scaramozzino

Abstract

This article examines the relationship between federal transfers and fiscal deficits in India. The current system of transfers has been criticized on the grounds that it distorts the incentives for states to promote fiscal discipline. We analyze the relationship between transfers, state domestic product, and fiscal deficit for a panel of states during the period 1990 to 2010. The article finds a positive long-run relationship and bidirectional causality between primary/gross fiscal deficits and non-plan transfers. Further, there is a negative long-run relationship and one-way causality from state domestic product to transfers. These results are confirmed by multivariate cointegration analysis, which finds a long-run relationship between fiscal transfers, state product per capita, and state primary deficit. The evidence in the article is consistent with the system of fiscal transfers being “gap filling.â€

Suggested Citation

  • Antra Bhatt & Pasquale Scaramozzino, 2015. "Federal Transfers and Fiscal Discipline in India," Public Finance Review, , vol. 43(1), pages 53-81, January.
    • Handle: RePEc:sae:pubfin:v:43:y:2015:i:1:p:53-81
    DOI: 10.1177/1091142113515049
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    References listed on IDEAS

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    1. Robin Boadway & Anwar Shah, 2007. "Intergovernmental Fiscal Transfers : Principles and Practice," World Bank Publications - Books, The World Bank Group, number 7171, December.
    2. Pedroni, Peter, 2004. "Panel Cointegration: Asymptotic And Finite Sample Properties Of Pooled Time Series Tests With An Application To The Ppp Hypothesis," Econometric Theory, Cambridge University Press, vol. 20(3), pages 597-625, June.
    3. Arulampalam, Wiji & Dasgupta, Sugato & Dhillon, Amrita & Dutta, Bhaskar, 2009. "Electoral goals and center-state transfers: A theoretical model and empirical evidence from India," Journal of Development Economics, Elsevier, vol. 88(1), pages 103-119, January.
    4. Miss Catriona Purfield, 2006. "Mind the Gap—Is Economic Growth in India Leaving Some States Behind?," IMF Working Papers 2006/103, International Monetary Fund.
    5. Kao, Chihwa, 1999. "Spurious regression and residual-based tests for cointegration in panel data," Journal of Econometrics, Elsevier, vol. 90(1), pages 1-44, May.
    6. Pedroni, Peter, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 61(0), pages 653-670, Special I.
    7. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
    8. Richard Herd & Willi Leibfritz, 2008. "Fiscal Policy in India: Past Reforms and Future Challenges," OECD Economics Department Working Papers 595, OECD Publishing.
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    Cited by:

    1. Yongqiu Wu & Yi Huang & Jing Zhao & Yanping Pu, 2017. "Transfer payment structure and local government fiscal efficiency: evidence from China," China Finance and Economic Review, Springer, vol. 5(1), pages 1-15, December.
    2. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "On the effects of intergovernmental grants: a survey," Working Papers. Collection A: Public economics, governance and decentralization 2204, Universidade de Vigo, GEN - Governance and Economics research Network.
    3. Bhatt Hakhu, Antra & Piergallini, Alessandro & Scaramozzino, Pasquale, 2014. "Public Capital Expenditure and Debt Dynamics: Evidence from the European Union," MPRA Paper 62827, University Library of Munich, Germany.
    4. Manuel E. Lago & Santiago Lago-Peñas & Jorge Martinez-Vazquez, 2022. "On the effects of intergovernmental grants: a survey," Working Papers. Collection A: Public economics, governance and decentralization 2204, Universidade de Vigo, GEN - Governance and Economics research Network.
    5. Aadil Ahmad Ganaie & Sajad Ahmad Bhat & Bandi Kamaiah & N. A. Khan, 2018. "Fiscal Decentralization and Economic Growth: Evidence from Indian States," South Asian Journal of Macroeconomics and Public Finance, , vol. 7(1), pages 83-108, June.

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