Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation

28 Pages Posted: 6 Apr 2013

See all articles by Antra Bhatt

Antra Bhatt

United Nations - Food and Agriculture Organization (FAO)

Pasquale Scaramozzino

University of Rome II - Faculty of Economics; University of London - School of Oriental and African Studies (SOAS); University of London - Centre for Financial and Management Studies (CeFIMS)

Date Written: March 1, 2013

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 “gapfilling.”

Keywords: federal transfers, India, public finance, panel cointegration, panel ECM

JEL Classification: H77, R23, C33

Suggested Citation

Bhatt, Antra and Scaramozzino, Pasquale, Federal Transfers and Fiscal Discipline in India: An Empirical Evaluation (March 1, 2013). Asian Development Bank Economics Working Paper Series No. 343, Available at SSRN: https://ssrn.com/abstract=2245402 or http://dx.doi.org/10.2139/ssrn.2245402

Antra Bhatt (Contact Author)

United Nations - Food and Agriculture Organization (FAO) ( email )

Viale delle Terme di Caracalla
Rome, Lazio 00100
Italy

Pasquale Scaramozzino

University of Rome II - Faculty of Economics ( email )

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Rome, 00100
Italy

University of London - School of Oriental and African Studies (SOAS) ( email )

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London, WC1H 0XG
United Kingdom

University of London - Centre for Financial and Management Studies (CeFIMS)

Thornhaugh Street
London, WC1H 0XG
United Kingdom

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