The IUP Journal of Applied Economics
An Analysis of Political Transfers from the Center to the States in India

Article Details
Pub. Date : Jan, 2020
Product Name : The IUP Journal of Applied Economics
Product Type : Article
Product Code : IJAE20120
Author Name : J S Darshini, K Gayithri
Availability : YES
Subject/Domain : Economics
Download Format : PDF Format
No. of Pages : 19



India is a federal country with asymmetric levels of development. The asymmetries are both vertical and horizontal in nature. This paper proceeds in two stages-in the first stage, it decomposes the level and pattern of fiscal dependency of states on the different components of total transfers. In the second stage, it examines the factors that influence the allocation of conditional/discretionary central transfers to the states. The study finds that successive Finance Commissions have gradually enhanced the share of states in the centralized divisible pool over a period of time. It is evident from the overall empirical outcome that states with a larger fiscal space and Gross State Domestic Product (GSDP) growth were able to get more funds as compared to the prevailing political factors during the first and third sub-periods. In all the three sub-periods, interactive dummies have played a significant role in determining the allocation of federal funds to the states.


The responsibility of fiscal asymmetry in powers of taxation and expenditure is vested in the federal structure. The responsibility of allocation of expenditure and revenue to different levels of government is the most fundamental issue in fiscal federalism. Under a federal system like India, the fiscal performance and the path of fiscal adjustment are closely linked. Fiscal performance is reflected in the existing resource gap which is referred to as the volume of expenditure financed from the alternative sources of revenue. A proper fiscal management involves both revenue and expenditure adjustment. In any fiscal system, the fiscal management at the sub-national level is closely linked with the level of fiscal dependency on the higher level of government.

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