Essays in fiscal federalism

Abstract

India, a quasi-federal structure specifies the provisions of federal transfers to sub-national governments to cushion their inadequate expenditure capacity. The intergovernmental transfers contribute a significant share in revenue of state governments. Therefore it is of interest to policy makers and researchers to understand how these transfers impact the fiscal variables at the sub-national level. Given this fact, this dissertation focused on the role of intergovernmental transfers in context of Indian sub-national governments. The three essays within this dissertation examined a unique question relating to the role of intergovernmental transfers. For instance, the first essay evaluated the state tax capacity and tax effort of 14 major Indian states from 1992-92 to 2010-11 using stochastic frontier analysis and examined the impact of inter-governmental transfers on it. Observing the spatial distribution of per-capita expenditure and its categories, the second essay studied the convergence in per-capita expenditure across states and examined whether intergovernmental transfers help to bring expenditure equality. Further, it is observed whether the impact of federal transfers on expenditure growth is sensitive to the type of transfer. The third essay focused upon the role of intergovernmental transfers on debt sustainability. It analyzes whether these federal transfers enhance or retard the ability of state governments to keep their budget in balance. newlineThe results from these essays provide number of outcomes on the impact on intergovernmental transfers on state budget. First, large variation was observed in tax effort index across states and which seemed to be increasing over time. Econometric analysis suggested that economic and structural variables have significant association with tax capacity. The evidence on tax efficiency suggested that the higher inter-governmental transfers tend to reduce tax efficiency. newlineSecond, federal transfers, although have equalized the level of per-capita expenditure across sub-natio