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Discretionary transfers in Indian federal finance: a panel data analysis

Discretionary transfers in Indian federal finance: a panel data analysis Despite existence of a constitutional demarcation of functions and finances between the centre and the states, it is alleged that the centre-state funds transfer systems in India have a political bargaining aspect that goes beyond the normative considerations. This paper makes an attempt to investigate if the political system allows to evolve a simple, equitable, objective and rule-based system of transfers. The aim of this paper is to explore the political economic determinants of discretionary fiscal transfers in India.Design/methodology/approachThis paper is based on a panel data set of 28 Indian states for the period 2001–2014. After diagnostic checking for fixed effects/random effects, the authors prefer to use fixed effects regression with Driscoll–Kraay standard errors and Arellano–Bover/Blundel and Bond system estimation model that uses moment conditions in which lagged first differences of the dependent variable are instruments for the level equation.FindingsThe findings of this study reveal that fiscal performance, economic capacity and political alliance are significant but some other political determinants such as bargaining power and election years are not significant in influencing discretionary transfers.Originality/valueConsidering the limited availability of literature on federal finance, the present paper is an addition to the existing research, especially on a crucial issue concerning extra-constitutional fiscal transfers in India. Analysing a balanced panel comprising all the Indian states and examining the role of various political-economic determinants makes this paper topical. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Indian Growth and Development Review Emerald Publishing

Discretionary transfers in Indian federal finance: a panel data analysis

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1753-8254
DOI
10.1108/igdr-08-2019-0086
Publisher site
See Article on Publisher Site

Abstract

Despite existence of a constitutional demarcation of functions and finances between the centre and the states, it is alleged that the centre-state funds transfer systems in India have a political bargaining aspect that goes beyond the normative considerations. This paper makes an attempt to investigate if the political system allows to evolve a simple, equitable, objective and rule-based system of transfers. The aim of this paper is to explore the political economic determinants of discretionary fiscal transfers in India.Design/methodology/approachThis paper is based on a panel data set of 28 Indian states for the period 2001–2014. After diagnostic checking for fixed effects/random effects, the authors prefer to use fixed effects regression with Driscoll–Kraay standard errors and Arellano–Bover/Blundel and Bond system estimation model that uses moment conditions in which lagged first differences of the dependent variable are instruments for the level equation.FindingsThe findings of this study reveal that fiscal performance, economic capacity and political alliance are significant but some other political determinants such as bargaining power and election years are not significant in influencing discretionary transfers.Originality/valueConsidering the limited availability of literature on federal finance, the present paper is an addition to the existing research, especially on a crucial issue concerning extra-constitutional fiscal transfers in India. Analysing a balanced panel comprising all the Indian states and examining the role of various political-economic determinants makes this paper topical.

Journal

Indian Growth and Development ReviewEmerald Publishing

Published: Mar 12, 2021

Keywords: Political economy; Fiscal federalism; Discretionary transfer; Driscoll–Kraay standard errors; Dynamic panel data method; H77; H79

References