Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation

Bhatt, Antra; Scaramozzino, Pasquale

Abstract

This article examines the relationship between federal transfers and fiscal deficits in India. The current system of 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 to 2010. The article finds a positive long-run relationship and bidirectional causality between primary/gross fiscal deficits and non-plan transfers. Further, there is a negative long-run relationship and one-way causality from state domestic product to transfers. These results are confirmed by multivariate cointegration analysis, which finds a long-run relationship between fiscal transfers, state product
per capita, and state primary deficit. The evidence in the article is consistent with the system of fiscal transfers being ‘‘gap filling.’’

Citation

Bhatt, A., & Scaramozzino, P. (2015). Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation. Public Finance Review, 43(1), 53-81. https://doi.org/10.1177/1091142113515049

• Journal Article Type: Article
• Online Publication Date: Jan 29, 2014
• Publication Date: Jan 1, 2015
• Deposit Date: Dec 22, 2014
• Publicly Available Date: Jan 24, 2025
• Journal: Public Finance Review
• Print ISSN: 1091-1421
• Electronic ISSN: 1552-7530
• Publisher: SAGE Publications
• Peer Reviewed: Peer Reviewed
• Volume: 43
• Issue: 1
• Pages: 53-81
• DOI: https://doi.org/10.1177/1091142113515049
• Keywords: Federal transfers, India, public finance, panel cointegration, panel ECM.
• Related Public URLs: http://pfr.sagepub.com/content/43/1/53.full.pdf+html