We study the effect of revenue decentralization (RD) and expenditure decentralization (ED) on sub-national growth in India from 1981–1982 to 2015–2016 for 14 large (non-special-category) states. Our study provides evidence that both RD and ED play a defining role in India’s sub-national growth in this three-and-a-half-decade period. We use a panel data model with fixed effects (FE) and Driscoll and Kraay standard errors that control for heteroscedasticity, autocorrelation and cross-sectional dependence. To test for causality between growth and decentralization, we use the Granger non-causality test. The regression analysis is supplemented with the distribution dynamics approach. We find that: (a) While decentralization Granger-caused economic growth, the reverse causality effect of growth on decentralization was not significant; (b) Economic growth increased significantly after liberalization; (c) Decentralization, capital expenditure and social expenditure had significant positive impacts on economic growth; and (d) States that had high levels of decentralization also had high levels of per capita income, while states that had low decentralization also exhibited low per capita income.

This paper examines the possibility of using fiscal devolution in India to achieve the Sustainable Development Goals. We propose alternative weights and criteria to see how allocation between states would change if the Finance Commission of India (FC) used a framework that incentivizes achievements in social and environmental outcomes. Two different proposals are examined—one where level values of the female–male ratio, female literacy rate and forest cover are used to decide allocations and another where incremental values are used. The advantage of the second proposal is that it reduces historical bias. We calculate the alternative allocation that would emerge using these proposals and compare it with the actual allocation for the last three Finance Commissions—XIII to the XV. We find that the reallocation among the states incentivizes better performers and also help India achieve the goals for sustainable development. JEL Classification: H77, Q56, Q58