Fiscal Federalism and Decentralization in India

Abstract

This paper surveys the state of fiscal federalism in India, in the broader context of decentralization. We begin with an overview of the basic features and recent developments in intergovernmental fiscal relations, including the role of political institutions, the specifics of legislative and budgetary autonomy, assignments of expenditure responsibility and revenue authority, revenue collection mechanisms, the system of intergovernmental transfers, and institutions and mechanisms for borrowing by subnational units. We then provide a diagnosis of accountability mechanisms, examining their quality of functioning and distortions and constraints. In particular, we analyze to what extent, and through what mechanisms, lower-level governments are held accountable to higher-level governments, the extent to which policies of subnational governments are affected by the competition for mobile firms, taxpayers, and investment capital, the functioning of credit markets, including the responsiveness of subnational governments to credit ratings and bond yields, and the role of democratic electoral channels at national and subnational levels in providing accountability in the provision of subnational public goods. Next, we review the implications of the intergovernmental system and accountability mechanisms on the cooperation of subnational governments and the quality of service delivery. We examine the resources and capacity of the subnational entities that are responsible for key services such as water, sanitation, education and health care, and the impacts of decentralization on service quality and the distribution of benefits among elected officials, citizens and interest groups. Finally, we offer a concluding assessment with suggestions for reform priorities.JEL codes: P26, P35, H1, H7

Holding India Together: The Role of Institutions of Federalism

“…Institutional innovations have been incremental, and in some respects have yet to catch up with the new political and economic environment. The intergovernmental transfer system, tax system and assignments of expenditure responsibilities all are in need of reform (Singh, 2007). An overarching issue may be that of how to reform the institutions that govern bargaining among the center and the states.…”

“…In these analyses, the focus is on the impact of federal institutions on the distribution of gains to cooperation, or other rents generated by the system, without seriously examining the underlying issue of whether the cooperation can be maintained. Singh (2007) discusses the idea of cooperative federalism in terms of distribution of the gains from cooperation among the center and subnational units, and applies a theoretical model to the Indian and Chinese cases, but again, the constituent units do not have an exit option in that framework. A partial exception is the discussion in Rao and Singh (2005, Chapter 4), where secession threats are linked to center-state transfers or assignments of property rights, and the durability of commitments to particular subnational units is also examined in the Indian context.…”

Theories of Governance and Development: How Does India’s Experience Fit?

“…A further complication, of course, is that India's states are not sovereign entities, but are influenced by, and influence the workings of the national government. This federal aspect of governance in India needs to be incorporated as well (Rao and Singh, 2005;Singh, 2007). 15 We recognize that no theory will explain everything, nor should it.…”

Capacidad tributaria y finanzas públicas metropolitanas en México / Fiscal Capacity and Metropolitan Public Finances in Mexico

“…El sistema de financiamiento público en las organizaciones federativas que presentan fuertes desigualdades intermunicipales descansa no sólo en las transferencias intergubernamentales como mecanismos de corrección de las disparidades socioeconómicas de los gobiernos subnacionales, también en la capacidad de generación de recursos tributarios propios (Singh, 2007;Bird y Ebel, 2005;Boadway, 2003;Rodden, 2002;Bird y Stauffer, 2001).…”

“…De acuerdo con los estudios clásicos y contemporáneos de la teoría de la tributación (Singh, 2007;Bird y Ebel, 2005;Boadway, 2003;Rodden, 2002;Bird y Stauffer, 2001;Bahl,1991;Oates, 1972;Musgrave, 1969) la capacidad tributaria de los gobiernos subnacionales depende, por una parte, de las características socioeconómicas y del desarrollo económico existentes en cada jurisdicción y, por otra parte, del grado de descentralización de la función recaudatoria en una nación. El grado de descentralización fiscal se mide por la mayor o menor participación de los gobiernos estatales o municipales en el ingreso y en el gasto total del sector público y por la autonomía que tengan en la conducción de las políticas típicas del gobierno.…”