Estimating Transfer Multiplier using Spending on Rural Development Programs in India

Rural development programs in India are implemented for a variety of reasons. A key question is whether such transfer spending by the government is consequential for the local economic activity. This chapter estimates the multiplicative effects of rural transfer spending on state agricultural output using a novel dataset of statewise expenditure on all major rural development programs that were operational between 1980-2010. Using government reports as narrative evidence we show that the principal motivation to introduce a new scheme is either (i) to replace old inefficient programs or (ii) to address a deep-rooted social or economic issue that has not been addressed by any existing program. Importantly, the introduction of a new scheme is largely independent of the current or prospective output fluctuations. Using this narrative evidence we isolate the “introductory variation” that occurs every time a new program is introduced as a measure of change in transfer spending that is exogenous to local output fluctuations. The results suggest that local variations in rural transfer spending can be quite consequential for the local economic activity in rural areas.