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Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation

Author

Listed:
  • Antra Bhatt

    (Università di Roma Tor Vergata)

  • Pasquale Scaramozzino

    (University of London)

Abstract

This paper examines the relationship between federal transfers and fiscal deficits in India. The system of federal transfers has been criticized on the grounds that it distorts the incentives for states to promote fiscal discipline. We analyze the relationship between transfers, state domestic product, and fiscal deficit for a panel of states during the period 1990–2010. The paper finds a positive long-run relationship and bi-directional causality between primary/gross fiscal deficits and non-plan transfers. Further, a negative long-run relationship and one-way causality between state domestic product and transfers is observed, with causality going from state product to transfers. These results are confirmed by multi-variate cointegration analysis, which finds a long-run relationship between fiscal transfers, state product per capita and the primary deficit of the states. The evidence in the paper is consistent with the system of fiscal transfers being “gap- filling.”

Suggested Citation

  • Antra Bhatt & Pasquale Scaramozzino, 2013. "Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation," ADB Economics Working Paper Series 343, Asian Development Bank.
    • Handle: RePEc:ris:adbewp:0343
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    Cited by:

    1. Yongqiu Wu & Yi Huang & Jing Zhao & Yanping Pu, 2017. "Transfer payment structure and local government fiscal efficiency: evidence from China," China Finance and Economic Review, Springer, vol. 5(1), pages 1-15, December.
    2. Aadil Ahmad Ganaie & Sajad Ahmad Bhat & Bandi Kamaiah & N. A. Khan, 2018. "Fiscal Decentralization and Economic Growth: Evidence from Indian States," South Asian Journal of Macroeconomics and Public Finance, , vol. 7(1), pages 83-108, June.

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    Keywords

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R23 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Regional Migration; Regional Labor Markets; Population

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