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Fiscal Federalism in India: A Case for Reassigning of Tax Powers

Author

Listed:
  • R. Srinivasan

    (Full-Time Member, State Planning Commission, Government of Tamil Nadu, Chennai - 600005)

  • S. Raja Sethu Durai

    (Professor, School of Economics, University of Hyderabad, Hyderabad - 500046)

Abstract

In an ideal federation, each level of government should have its own revenue resources to sufficiently finance its own expenditures. In most of the federal countries, due to overlapping revenue and expenditure assignments warranted by their constitution, the fiscal balance is elusive. Vertical Fiscal Imbalance (VFI) arises when the own revenue potential of regional governments is inadequate to meet their own expenditure. As noted in the literature, VFI adversely affects the fiscal performance of the regional government. This study examines the VFI for India from 2005 to 2021 and provides evidence that it is raising over the period, and a feasible solution rests in the reassignment of commodity taxation powers to the states.

Suggested Citation

  • R. Srinivasan & S. Raja Sethu Durai, 2022. "Fiscal Federalism in India: A Case for Reassigning of Tax Powers," Working Papers 2022-230, Madras School of Economics,Chennai,India.
    • Handle: RePEc:mad:wpaper:2022-230
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    References listed on IDEAS

    as
    1. Rao, C. Bhujanga & Srivastava, D.K., 2014. "Dependence of States on Central Transfers: State-wise Analysis," Working Papers 14/137, National Institute of Public Finance and Policy.
    2. Eyraud, Luc & Lusinyan, Lusine, 2013. "Vertical fiscal imbalances and fiscal performance in advanced economies," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 571-587.
    3. Velasco, Andres, 2000. "Debts and deficits with fragmented fiscal policymaking," Journal of Public Economics, Elsevier, vol. 76(1), pages 105-125, April.
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    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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