State Capacity and the Soft Budget Constraint: Fiscal Federalism, Indian Style

34 Pages Posted: 20 May 2020

See all articles by Pradyumn Tripathi

Pradyumn Tripathi

Ministry of Finance

Theocharis Grigoriadis

Free University of Berlin (FUB) - Department of Business and Economics

Date Written: May 17, 2020

Abstract

In this paper, we explore the effects of India’s federal structure on state-level fiscal responsibility. Drawing from a dataset that covers the period from 1991 to 2019, we argue that a low marginal retention rate, a high level of transfer dependence and a high level of borrowing dependence (soft budget constraints) from the central government facilitates lower levels of fiscal responsibility in intergovernmental relations. Our hypothesis is tested using random effects, and fixed effects panel estimations of regressions on fiscal responsibility outcomes across Indian states. We also account for the effects of the world’s largest employment program, the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), on subnational fiscal responsibility. We find that the fulfillment of rural public employment measures is conducive to lower levels of fiscal responsibility. Moreover, we argue for the persistence of soft budget constraints as a key structural feature of Indian federalism.

Keywords: fiscal federalism, soft budget constraint, social policy, India

JEL Classification: O53, O57, P16, P51

Suggested Citation

Tripathi, Pradyumn and Grigoriadis, Theocharis, State Capacity and the Soft Budget Constraint: Fiscal Federalism, Indian Style (May 17, 2020). Available at SSRN: https://ssrn.com/abstract=3603422 or http://dx.doi.org/10.2139/ssrn.3603422

Pradyumn Tripathi

Ministry of Finance ( email )

India

Theocharis Grigoriadis (Contact Author)

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

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