Interregional Fiscal Flows and Horizontal Fiscal Equalization in India, 2001-2015

There is a large body of literature measuring interregional fiscal flows through federal fiscal policy in the European and North American contexts. However, federal countries in the developing world have not received similar attention. This article provides the first published estimates of interregional fiscal flows in India for the period 2001-2015. The estimates show that nearly 40 percent of the Indian population lives in "donor" or net contributing states, which provide fiscal resources to the rest of the country. In the presence of wide regional disparities and a small donor base, fiscal redistribution does not succeed as a tool for eliminating regional income inequalities. However, fiscal redistribution does serve an important purpose in reducing initial regional fiscal inequalities by 60 percent. Contrary to the existing literature on developed countries, in this study it is observed that taxation rather than expenditure emerges as the main channel of interregional fiscal redistribution in India. With respect to measurement, the author of the article argues for utilizing primary fiscal balances under a balanced budget approach to avoid double-counting and to control for fiscal deficit.