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Fiscal Decentralization, the Composition of Public Spending, and Regional Growth in India

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  • Tao Zhang

    (Development Research Group, The World Bank)

  • Heng-fu Zou

    (Development Research Group, The World Bank)

Abstract

In this paper, we present an analytical model for examining the growth impact of intergovernmental and intersectoral allocation of public expenditure. The model helps us quantify the role of fiscal decentralization in regional economic growth and identify whether central and local allocation of public spending among various sectors are growth-enhancing. Applying our analytical framework to a panel data set of 16 major states in India, we have found that, in many cases of our regressions, fiscal decentralization is positively, and even statistically significantly, associated with state economic growth. The state allocation of public spending in various sectors is broadly consistent with "growth-maximizing", whereas increases in the central allocation of its budget among development projects, nondevelopment projects, and social and community services by cutting the center¡¯s spending on all other functions can promote regional growth. Furthermore, the distortionary effect of the state tax in India is dominated by the productive effect of tax-financed public spending, whereas the reverse holds for the central tax.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 521.

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Date of creation: 1997
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Handle: RePEc:cuf:wpaper:521

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Web page: http://cema.cufe.edu.cn/
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Cited by:
  1. Jorge Martinez-Vazquez & Robert McNab, 1997. "Fiscal Decentralization, Economic Growth, and Democratic Governance," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper9707, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  2. M.Govinda Rao & Raghunandan, T.R., 2011. "Panchayats and Economic Development," Working Papers 11/86, National Institute of Public Finance and Policy.
  3. Anwar Shah & Theresa Thompson & Heng-fu Zou, 2004. "Decentralising the public sector: The Impact of Decentralisation on Service Delivery, Corruption, Fiscal Management and Growth in Developing and Emerging Market Economies: A Synthesis of Empirical Evi," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 2(1), pages 10-14, October.
  4. Roy Bahl & Jorge Martinez-Vazquez, 2013. "Sequencing Fiscal Decentralization," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 641-687, November.
  5. Martinez-Vazquez, Jorge & McNab, Robert M., 2003. "Fiscal Decentralization and Economic Growth," World Development, Elsevier, vol. 31(9), pages 1597-1616, September.
  6. Jorge Martínez Vázquez & Robert M. McNab, 2006. "Fiscal decentralization, macrostability and growth," Hacienda Pública Española, IEF, IEF, vol. 179(4), pages 25-49, September.
  7. Loenardo Letelier Saavedra, 2004. "Decentralising the public sector: Fiscal Decentralisation as a Mechanism to Modernise the State - Truths and Myths," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 2(1), pages 15-20, October.

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