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Federalism and fiscal reform in India


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  • M. Govinda Rao

    (National Institute of Public Finance and Policy)

  • Sen, Tapas K.

    (National Institute of Public Finance and Policy)


This paper attempts to analyse the experience of incentivising economic reforms at the state level through central transfers to states. It reviews the experiences of the central government introducing incentives for reform directly through various specific purpose transfers as well as the incentive schemes recommended by various Finance Commissions. The incentive schemes directly introduced by the central government include, accelerated irrigation benefit programme, accelerated power development and reform programme, Jawaharlal Nehru Urban Renewal Mission, education and health sector reforms. The reforms recommended by the Finance Commissions include incentivising tax reforms and fiscal restructuring and consolidation. The review of the experiences of Indian fiscal federalism shows that the incentivising reforms have neither been an unqualified success nor have they been a total failure. There are interesting lessons to be learnt from the experiences for both designing the incentive schemes and implementing them. The paper summarises the lessons of experience. While incorporating these in designing and implementing incentive schemes can be useful in the short and medium term, what matters in the long run is the political incentive for reforms.

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Bibliographic Info

Paper provided by National Institute of Public Finance and Policy in its series Working Papers with number 11/84.

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Length: 28
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:npf:wpaper:11/84

Note: Working Paper 84, 2011
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  1. Bird,Richard & Gendron,Pierre-Pascal, 2007. "The VAT in Developing and Transitional Countries," Cambridge Books, Cambridge University Press, number 9780521877657, October.
  2. SALMON, Pierre, 2005. "Horizontal competition among governments," LEG - Document de travail - Economie 2005-02, LEG, Laboratoire d'Economie et de Gestion, CNRS, Université de Bourgogne.
  3. R.Kavita Rao, 2009. "Goods and Services Tax for India," Working Papers id:2055, eSocialSciences.
  4. Singh, Nirvikar & Rao, Govinda, 2006. "Political Economy of Federalism in India," OUP Catalogue, Oxford University Press, number 9780195686937.
  5. M. Govinda Rao & Pinaki Chakraborty, 2006. "Multilateral adjustment lending to states in India: Hastening fiscal correction or softening the budget constraint?," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 15(3), pages 335-357.
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