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Reforming India’S Fiscal Transfer System: Resolving Vertical And Horizontal Imbalances

Author

Listed:
  • C. Rangarajan

    (Madras School of Economics)

  • D. K. Srivastava

    (Madras School of Economics)

Abstract

Two central problems in a fiscal transfer system relate to resolving vertical and horizontal imbalances. In the context of the setting of the 13th Finance Commission, this paper looks at the methodological background of fiscal transfers followed by recent Finance Commissions in India, particularly the Twelfth Finance Commission (TFC). It is noted that in India, there is long - term stability in the share of states after transfers in the combined revenues of the centre and the states. It is argued that this stability depends on linking the share of states in the transfers, particularly tax devolution with the difference in the buoyancies of central and states taxes. In the context of horizontal imbalance, it is argued that some of the recent Finance Commissions have implicitly followed an axiomatic approach to tax devolution and brought in some normative elements in determining grants. In spite of large difference in fiscal capacities, a high degree of equalization has been achieved. It is shown, for example, that in the case of TFC recommended transfers, nearly 88 percent of needed equalization was achieved while devoting 50 percent of transfers to resolving vertical imbalance. A methodology is also developed to determine weights of vertical and equalizing components of transfers through devolution. In the case of the Twelfth Finance Commission, the horizontal component of tax devolution is strengthened by a scheme of equalizing health and education grants.

Suggested Citation

  • C. Rangarajan & D. K. Srivastava, 2008. "Reforming India’S Fiscal Transfer System: Resolving Vertical And Horizontal Imbalances," Working Papers 2008-031, Madras School of Economics,Chennai,India.
  • Handle: RePEc:mad:wpaper:2008-031
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    References listed on IDEAS

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    Cited by:

    1. R. Mohan & N. Ramalingam & D. Shyjan, 2014. "Horizontal Devolution of States in India-Suggestions Before the Fourteenth Finance Commission," Working Papers id:5965, eSocialSciences.
    2. D.K. Srivastava, 2023. "Evolving Contours of Centre-State Fiscal Relations: Inconsistencies, Ad-Hocism and Centralization," Working Papers 2023-239, Madras School of Economics,Chennai,India.
    3. R Mohan & Shyjan D, 2010. "Tax Devolution and Grant Distribution to States in India Analysis and Roadmap for Alternatives," Working Papers id:2421, eSocialSciences.
    4. Das, Nimai, 2016. "Federal Fiscal Transfers on Health: Implications of Fourteenth Finance Commission Recommendations at Subnational Level," MPRA Paper 79627, University Library of Munich, Germany.

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