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Determining Environmental Quality in a Federal Setting: An Empirical Analysis of Subnational Governments in India

Chakraborty, Lekha S (2006): Determining Environmental Quality in a Federal Setting: An Empirical Analysis of Subnational Governments in India.

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Abstract

Against the analytical backdrop of environmental federalism, the paper examines the impact of fiscally decentralized public policy stance on environmental quality in India. Unlike many studies which analysed the fiscally decentralized determination of environmental welfare from tax-side through modeling interjurisdictional competition and ‘race to bottom’, this paper attempts to look at the link from public expenditure side in a Kuznets’ U specification. The paper does not refute the widely explored Kuznets U phenomenon between economic growth and the environmental quality, rather it emphasizes that it does substantially through conscious public policies on reforestation and pollution abatement with adequate public expenditure decisions. Using GSLS and fixed effects model of pooled least squares for the late 1990s, the analysis of the link between decentralized environmental expenditure in per capita terms and the environmental quality indicators for the forestry sector revealed that there is a positive functional relationship between the variables. The models also revealed the effectiveness of economic growth variables in creating the Kuznet’s U effect on environmental quality. However, the panel estimates showed that fiscal policy has a stronger impact on environmental quality than the Kuznets U-impact of economic growth. This result is in confirmation with the trend that fiscal policies on environmental capital formation gets transformed to the end results of better environmental quality indicators, despite the constraints of initial negative impacts of economic growth on ecology.

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