Decentralization and Its Impact on Growth in India

Abstract

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.

Exploring the asymmetric effect of fiscal decentralization on economic growth and environmental quality: evidence from India

“…Therefore, this result supports three hypotheses that are based on fiscal decentralization analysis, namely “decentralization theorem” of Oates ( 1972 ), the “Leviathan hypothesis” (Brennan and Buchanan 1980 ), and the “Productivity enhancement hypothesis” (Martinez-Vazquez and McNab 2003 ). The result of this work is also in line with the previous work (Arif and Ahmad 2020 ; de Xavier et al 2021 ; Hanif et al 2020 ; Hung and Thanh 2022 ). Apart from EDR, revenue decentralization (RDR) also boost-up the EG in various manners (Nguyen and Anwar 2011 ).…”

“…The empirical research, however, indicates no agreement on the association between the two. The connection between FD and economic growth has been extensively discussed throughout the recent decades (Baskaran and Feld 2013 ; de Xavier et al 2021 ; Ganaie et al 2018 ; Iimi 2005 ; Liu et al 2019 ). FD is thought to boost output by introducing “transparency and lowering corruption by closely tying elected leaders and voters” together (Abdellatif et al 2015 ).…”

“…To the best of our knowledge, there is no study which has seriously attempted to explore these issues in the context of a developing country like India. Few studies have explored the relationship between fiscal decentralization and economic growth in India without considering environmental quality (Bardhan 2002 ; Xavier et al 2021 ; Escolano et al 2012 ; Ganaie et al 2018 ; Tarigan 2003 ). Using the “environmental Kuznets curve” (EKC), some other studies have examined the link between environmental quality and economic growth without considering fiscal decentralization (Ghosh 2010 ; Jayanthakumaran et al 2012 ; Sajeev and Kaur 2020 ; Tiwari 2012 ).…”

Expenditure Practices of Provincial and Local Governments: The Case of Nepal

“…De Xavier et al (2021) examined the effects of decentralization on India's subnational economic growth. The study was carried out using a fixed effect panel data model for a period from 1981/82 to 2015/16.…”

Can Fiscal Transfers Help India Meet Its SDG Goals?

“…In this paper, we examine how India can use its constitutional devolution mechanism within the framework for fiscal federalism. There have been many assessments of the decentralization process in India which peripherally approach the SDGs such as mobilizing communities (Rajasekhar et al, 2022), economic growth (de Xavier et al, 2021), forestry (Busch et al, 2020;Dasgupta & Srikanth, 2021) and ecosystem services (Kumar & Managi, 2009). However, very few studies have examined the issue of fiscal devolution and its impact on multiple SDGs.…”