Intergovernmental transfers and fiscal equalization across the north‐eastern states of India: Evidence from panel data

• Published date: 01 November 2023
• Author: Gargee Sarmah,Prasant Kumar Panda
• Date: 01 November 2023
• DOI: http://doi.org/10.1002/pa.2872

RESEARCH ARTICLE

Intergovernmental transfers and fiscal equalization across

the north-eastern states of India: Evidence from panel data

Gargee Sarmah

1

| Prasant Kumar Panda

2

1

Department of Economics, Central University

of Tamil Nadu, Thiruvarur, India

2

Department of Economics, Pondicherry

University, Puducherry, India

Correspondence

Gargee Sarmah, Department of Economics,

Central University of Tamil Nadu,

Thiruvarur, India.

Email: gargeesarmah19@students.cutn.ac.in

While numerous studies have tried to analyze the impact of intergovernmental

transfers in fostering fiscal equalization in India, there need to be more studies in the

context of north-eastern (NE) states. Situating in a geographically isolated and eco-

nomically backward region, the states of NE India depend heavily on central fiscal

transfers to meet expenditures and to promote various economic activities in the

region. One of the essential objectives of these transfers is to achieve fiscal equity.

Hence, the study attempts to analyze the fiscal equalizing nature of the intergovern-

mental transfers across NE India during 1991–2019. The coefficient of variation

(CV) analysis results indicates that although fiscal transfers reduced the magnitude of

disparity in the own-source revenue across the NE states, a significant amount of dis-

parity still exists in the resource base across these states. The regression analysis

findings suggest that the transfers across these states need to be more fiscal equaliz-

ing. The per capita gross state domestic product emerges as a positive and significant

in predicting per capita transfers, and hence it questions the progressivity of central

transfers. When assigning the interstate share of transfers, more weight should be

placed on fiscal equalizing factors such as per capita income. The Finance Commis-

sion of India should emphasize fiscal equalizing criteria when allocating weights and

recommending transfers to the NE States. Additionally, states with low incomes

should be recognized in plan schemes.

KEYWORDS

federal fiscal transfers, finance commission transfers, fiscal capacity, fiscal disparity, fiscal

equalization, horizontal equity, plan transfers

1|INTRODUCTION

Intergovernmental transfers have some goals, which, as mentioned in

the established literature, are to achieve macroeconomic stabilization,

distribution of public/social goods, efficient redistribution of income,

and ensure equal fiscal treatment for the equals (Buchanan, 1950;

Musgrave, 1971; Oates, 1999). Additionally, these payments provide

for a gap-filling purpose, that is, to bridge the “fiscal gap,”that is, the

discrepancy between the states' capacity to generate their own reve-

nue sources and their respective responsibilities to facilitate expendi-

tures (Bird & Tarasov, 2004; Boadway, 2015). Hence, one of the

major objectives of these transfers is to equalize the resource base of

state governments, to correct inter-state spill-overs and improve

efficiency, and inter-alia. The phrase “equity”or “equalizing”in the

field of federalism caters to an idea incorporating the concepts of fair-

ness and equality, with the former being emphasized more greatly.

Any mismatch between the allocation of responsibilities and the avail-

ability of resources at different government levels may hinder the

effectiveness of federalism. “Efficiency”is another criterion that fiscal

transfers need to consider. Decentralized delivery of public goods and

services can increase efficiency through attempts to ascertain that it

is more in line with local preferences and needs, encourages greater

political liability, enhances effectiveness in costs and reduces agency

and administrative costs involved with a central bureaucracy while

Received: 20 September 2022 Revised: 18 April 2023 Accepted: 22 May 2023

DOI: 10.1002/pa.2872

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https://doi.org/10.1002/pa.2872