Intergovernmental Transfer Rules, State Fiscal Policy And Performance In India

In the federal economy like India intergovernmental transfer policies affect the state revenue and expenditure policies. This paper provides a theoretical model of determining optimal fiscal policy of the state governments in India. State's optimum fiscal policy depends on the rules applied by transferring agencies in transferring funds to the sub national governments. Three important criteria revenue effort, deficit financing and distance criterion are considered to estimate the weight assigned to these criteria. The comparison of actual state own revenue and expenditure policies with the optimum policy reveals that states are spending more than estimated optimum level and collecting revenues less than the optimum level. The deviation of actual values from the optimum values also give us some idea regarding to which direction the state governments should change its existing revenue and expenditure policies. The analysis is based on fourteen major states in India over the period 1980–2005.