Federalism and economic development in India: An assessment

Singh, Nirvikar and Srinivasan, T.N. (2006): Federalism and economic development in India: An assessment.

Abstract

This paper examines India’s federal system in the context of prospects for India’s future economic growth and development. After a brief review of India’s recent policy reforms and economic development outcomes, and of the country’s federal institutions, the analysis focuses on the major issues with respect to India’s federal system in terms of their developmental consequences. We examine the impacts of tax assignments, expenditure authority and the intergovernmental transfer system on the following aspects of India’s economy and economic performance: the quality of governance and government expenditure, the efficiency of the tax system, the fiscal health of different tiers of government, and the impacts on growth and on regional inequality. In each case, we discuss recent and possible policy reforms. We make comparisons with China’s federal system where this is instructive for analyzing the Indian case. Finally, we provide a discussion of potential reforms of aspects of India’s federal institutions.

• Item Type: MPRA Paper
• Language: English
• Keywords: India, China, federalism, economic development,fiscal federalism, intergovernmental transfers, decentralization
• Subjects: H - Public Economics > H1 - Structure and Scope of Government; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations; P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P35 - Public Economics; H - Public Economics > H5 - National Government Expenditures and Related Policies; H - Public Economics > H2 - Taxation, Subsidies, and Revenue; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P26 - Political Economy ; Property Rights; H - Public Economics > H6 - National Budget, Deficit, and Debt

References

Bahl, Roy and Jorge Martinez-Vazquez (2005), Fiscal Federalism and Economic Reform in China, in T.N. Srinivasan and Jessica Wallack, eds., Federalism and Economic Reform: International Perspectives, Cambridge, UK: Cambridge University Press.

Bhattacharya, Saugata, and Urjit Patel (2008) “The Power Sector in India: An Inquiry into the Efficacy of the Reform Process” presented at India Policy Forum, New Delhi, July 17-18, 2007.

Biswas, R. and S. Marjit (2000), “Political Lobbying and discretionary Finance in India: An Aspect of Regional Political Influence in a Representative Democracy,” processed, Center for Studies in social Sciences, Calcutta.

Brass, Paul (1990), The Politics of India Since Independence, New York: Cambridge University Press.

Brennan, Geoffrey, and James M. Buchanan (1980), The Power to Tax: Analytical Foundations of a Fiscal Constitution, Cambridge: Cambridge University Press.

Breton, Albert (1995), Competitive Governments: An Economic Theory of Politics and Public Finance, Cambridge University Press, New York.

Breton, Albert (2000), Federalism and decentralization: ownershp rights and the superiority of federalism, Publius: The Journal of Federalism, Vol. 30. No. 2 (Spring), pp. 1-16.

Cao, Yuanzheng, Yingyi Qian, and Barry R. Weingast. 1999. From Federalism, Chinese Style, to Privatization, Chinese Style, Economics of Transition. vol 7 no. 1: 103-31.

Careaga, Maite, and Barry Weingast, 2001, Fiscal Federalism, Good Governance, and Economic Growth in Mexico, working paper, Stanford University

Chakraborty, Pinaki and M. Govinda Rao (2006), Multilateral Adjustment Lending to States: Hastening Fiscal Correction or Softening the Budget Constraint?, Journal of International Trade and Economic Development, 15:3, pp. 335-358.

Chhibber, Pradeep (1995) “Political Parties, Electoral Competition, Government Expenditures and Economic Reform in India,” Journal of Development Studies, Vol. 32, No. 1, October, pp.74-96

Das-Gupta, Arindam, and Dilip Mookherjee (1998), Incentives and Institutional Reforms in Tax Enforcement: An Analysis of Developing Country Experience, Delhi: Oxford University Press.

Dasgupta, Sugato, Amrita Dhillon and Bhaskar Dutta (2001), “Electoral Goals and Center-State Transfers in India”, processed, Indian Statistical Institute, New Delhi.

DeLong, J. Bradford (2003), “India Since Independence: An Analytic Growth Narrative,” in In Search of Prosperity: Analytic Narratives on Economic Growth, ed. Dani Rodrik, Princeton, New Jersey: Princeton University Press.

de Zwart, Frank (1994),The Bureaucratic Merry-Go-Round: Manipulating the Transfer of Indian Civil Servants Amsterdam: Amsterdam University Press,

David Dollar, Giuseppe Iarossi and Taye Mengistae (2002), “Investment Climate and Economic Performance: Some Firm Level Evidence from India”, paper presented at 3rd annual Stanford Conference on Indian Economic Reform, June.

Drèze, Jean, and Harris Gazdar, (1996), “Uttar Pradesh: The Burden of Inertia,” in Indian Development: Selected Regional Perspectives, ed. by Jean Drèze and Amartya Sen (Oxford and Delhi: Oxford University Press).

Fedelino, Annalisa and Teresa Ter-Minassian, (2006), Intergovernmental Fiscal Relations in China, Paper presented at the Stanford Conference on Economic Challenges in Asia, June 1-3.

Government of India (2008), Monthly Economic Report, New Delhi, Ministry of Finance, Department of Economic Affairs, May.

Hall, Richard L., and Bernard Grofman, (1990) “The Committee Assignment Process and the Conditional Nature of Committee Bias,” American Political Science Review, Vol. 84, No. 4 (December), pp.1149-66

Hausmann, Ricardo, and Catriona M. Purfield, 2005, “The Challenge of Fiscal Adjustment in a Democracy: The Case of India,” A Sustainable Fiscal Policy for India: An International Perspective, Peter Heller and M. Govinda Rao, ed., Oxford University Press

Howes, Stephen (2005), Reforms to India’s Federal Transfer and Borrowing Regime Proposed by the Twelfth Finance Commission: what will they mean for the states? presentation at Conference on 'Fiscal Responsibility and Intergovernmental Finance' - June 22-24, Hyderabad, http://siteresources.worldbank.org/INTINDIA/Resources/Stephen.pdf.

Howes, Stephen, and Rinku Murgai, 2005, “Subsidies And Salaries: Issues in the Restructuring of Government Expenditure in India,” A Sustainable Fiscal Policy for India: An International Perspective, Peter Heller and M. Govinda Rao, ed., Oxford University Press

Inman, Robert P. and Daniel L. Rubinfeld, “The Political Economy of Federalism," in Dennis Mueller, ed., Perspectives on Public Choice: A Handbook (Cambridge: Cambridge University Press, 1997), pp.73-105

Jin, Hehui, Yingyi Qian, and Barry R. Weingast (2005), Regional decentralization and fiscal incentives: Federalism, Chinese style, Journal of Public Economics 89, 1719–1742

Kapur and Mehta (2002) “The Indian Parliament as an Institution of Accountability,” Report prepared for the IPU, Harvard University (May) Kelkar, Vijay (2004), India: On the Growth Turnpike, K.R. Narayanan Oration, Australian National University

Khemani, Stuti, 2002; Federal Politics and Budget Deficits: Evidence from the States of India, World Bank Development Research Group Paper, WPS 2915

Kohli, Atul, Democracy and Discontent: India’s Growing Crisis of Governability (New York: Cambridge University Press, 1990).

Montinola, Gabriella, Yingyi Qian, and Barry R. Weingast. 1995. “Federalism, Chinese Style.” World Politics. 48(1): 50-81.

Mukherji, Joydeep (2006), Economic Growth and India’s Future, Occasional Paper 26, Center for Advanced Study of India, University of Pennsylvania

Mundle, Sudipto and M. Govinda Rao (1991), “Volume and Composition of Government Subsidies in India,” Economic and Political Weekly, Vol. XXVI, No. 18, May 4, pp. 1157-72.

Musgrave, R.A. (1959), The Theory of Public Finance, McGraw-Hill Book Company, New York.

Noll, Roger, and T.N. Srinivasan (2006), More Efficient Subsidy Scheme Benefits Consumers, Government and Economy, SIEPR Policy Brief, Stanford Institute for Economic Policy Research, Stanford University, May.

Oates, W.E. (1977), An economist’s perspective of fiscal federalism, in Oates (ed.) Political Economy of Fiscal Federalism, Cambridge, Massachusetts: Lexington Books, pp. 3-20.

Oliveira, Jesus, (2001) Economic Effects of Origin and Destination Principle for Value-Added Taxes, working paper, School of Business and Public Management George Washington University, April.

Olson, M. (1986), "Toward a More General Theory of Governmental Structure", American Economic Review, May.

Olson, Mancur (1993), Dictatorship, Democracy and Development, American Political Science Review, 87, 567-575.

Panagariya, Arvind (2005), The Triumph of India’s Market Reforms: The Record of the 1980s and 1990s, Policy Analysis, November 7, No. 554.

Parikh, Sunita and Barry Weingast, 1997, A Comparative Theory of Federalism: India, Virginia law Review, 83(7), 1593-1615.

PROBE Team (1999), in association with Center for Development Economics, Public Report on Basic Education in India, New Delhi: Oxford University Press. Purfield, Catriona (2003), “The Decentralization Dilemma in India,” IMF Working Paper, Washington: International Monetary Fund.

Rajaraman, Indira (2008), “The Political Economy of the Indian Fiscal Federation,” in Suman Bery, Barry Bosworth and Arvind Panagariya, eds. (2008), India Policy Forum 2006-07, New Delhi, National Council for Applied Economic Research.

Rajaraman, Indira (2005), “Intergovernmental Finance and Policy Coordination: Implications of the Report of the Twelfth Finance Commission”, presentation at Conference on 'Fiscal Responsibility and Intergovernmental Finance' - June 22-24, Hyderabad, http://siteresources.worldbank.org/INTINDIA/Resources/IndiraRajaraman-ppt.pdf.

Rangarajan, C. (2005), Approach and Recommendations, Economic and Political Weekly, July 30, 3396-98.

Rao, M. Govinda (2000), “Tax Reform in India: Achievements and Challenges”, Asia-Pacific Development Journal, 7, 2, 59-74.

Rao, M. Govinda (2003a), “State Level Fiscal Reforms in India”, paper presented at Cornell University, conference on Indian Economic Reform, April 19-20.

Rao, M. Govinda (2003b), Challenges of Fiscal Decentralization in Developing and Transitional Economies: An Asian Perspective, in James Alm and Jorge Martinez-Vazquez, Public Finance in Developing and Transitional Countries, Northampton, MA: Edward Elgar, pp. 35-62.

Rao, M. Govinda (2006), Fiscal Federalism in Planned Economies, in Ehtisham Ahmad and Giorgio Brosio, eds. Handbook of Fiscal Federalism, Northampton, MA: Edward Elgar, pp. 224-239.

Rao, M. Govinda and Pratap Jena (2005), Balancing Stability, Equity and Efficiency, Economic and Political Weekly, July 30, 3405-3412.

Rao, M. Govinda and Sudipto Mundle (1992), “Analysis of Changes in State Government Subsidies 1977-1987,” in Bagchi, Amaresh, J. L. Bajaj and W. A. Byrd (eds), State Finances in India, Vikas Publishing House, New Delhi. pp. 103-143.

Rao, M. Govinda and Kavita Rao (2006), Trends and Issues in Tax Policy and Reform in India, paper presented at Brookings-NCAER conference on India, March 2006.

Rao, M. Govinda, and Nirvikar Singh (2002), “Fiscal Transfers in a Developing Country: The Case of India”, paper presented at University of Birmingham conference on comparative federalism, January.

Rao, M. Govinda, and Nirvikar Singh (2003), How to Think About Local Government Reform in India (with M.G. Rao), in Economic Reform and the Liberalisation of the Indian Economy: Essays in Honour of Richard T. Shand, ed., K.P. Kalirajan. Edward Elgar., pp. 335-390

Rao, M. Govinda, and Nirvikar Singh (2005), Political Economy of Federalism in India, Oxford University Press, New Delhi.

Rao, M. Govinda, and Nirvikar Singh (2006), The Political Economy of India’s Fiscal Federal System and its Reform, Publius: The Journal of Federalism, Advance Access published on October 10, 2006, doi:10.1093/publius/pjl014

Reserve Bank of India (2001-7), Annual Reports, RBI: Mumbai.

Reserve Bank of India (2006a), State Finances: A Study of State Budgets, 2006-07, RBI: Mumbai.

Reserve Bank of India (2007a), State Finances: A Study of State Budgets, 2007-08, RBI: Mumbai.

Reserve Bank of India (2007), Macroeconomic and Monetary Developments, RBI: Mumbai.

Reserve Bank of India (2008a), Macroeconomic and Monetary Developments, RBI: Mumbai.

Reserve Bank of India (2008), Handbook of Statistics on Indian Economy, Mumbai, Reserve Bank of India.

Riker, William H. (1964), Federalism. Boston: Little, Brown.

Rodden, Jonathan (2006), “The Political Economy of Federalism,” in Barry Weingast and Donald Wittman, eds., Oxford Handbook of Political Economy (forthcoming, Oxford University Press).

Rodden, Jonathan and Susan Rose-Ackerman, (1997), Does Federalism Preserve Markets?, Virginia Law Review, 83, 1521.

Rodrik, Dani (2003) “Introduction: What Do We Learn from Country Narrratives?” in Dani Rodrik, ed., In Search of Prosperity Analytic Narratives on Economic Growth, (Princeton, New Jersey: Princeton University Press)

Rodrik, Dani and Arvind Subramanian (2004a),‘From Hindu Growth to Productivity Surge: The Mystery of the Indian Growth Transition’, National Bureau of Economic Research Paper, No 10376.

Rodrik, Dani and Arvind Subramanian (2004b), Why India Can Grow at 7 Per Cent a Year or More: Projections and Reflections, Economic and Political Weekly, April 17,

Rudolph, Lloyd I., and Susanne H. Rudolph, In Pursuit of Lakshmi: The Political Economy of the Indian State (Chicago: University of Chicago Press, 1987).

Shleifer, Andrei “Establishing Property Rights,” in Michael Bruno and Boris Pleskovic, eds., Proceedings of the World Bank Annual Conference on Development Economics 1994 (Washington, DC: World Bank, 1995), pp.93 –117.

Shome, Parthasarathi (2006), At the Threshold of 10 Per Cent Economic Growth?, Economic and Political Weekly, March 18.

Singh, Nirvikar (2004), Some Economic Consequences of India's Institutions of Governance: A Conceptual Framework, India Review, vol. 3, no. 2, April, pp. 114-146

Singh, Nirvikar (2006a), State Finances in India: A Case for Systemic Reform, in Documenting Reforms: Case Studies from India, ed. S. Narayan, New Delhi: Macmillan, pp. 56-86.

Singh, Nirvikar (2006b), Services-Led Industrialization in India: Assessment and Lessons, in Industrial Development for the 21st Century: Sustainable Development Perspectives, New York: UN-DESA, pp. 235-291.

Singh, Nirvikar (2007a), Fiscal Decentralization in China and India: Competitive, Cooperative or Market Preserving Federalism?, forthcoming, Public Finance Management

Singh, Nirvikar (2007b), The Dynamics of Reform of India’s Federal System, CESifo Forum - Issue on China & India, vol. 8, No. 1, pp. 22-31.

Singh, Nirvikar, and T.N. Srinivasan (2005a), “Indian Federalism, Globalization and Economic Reform,” in T.N. Srinivasan and Jessica Wallack, eds., Federalism and Economic Reform: International Perspectives, Cambridge, UK: Cambridge University Press, pp. 301-363.

Singh, Nirvikar, and T.N. Srinivasan (2005b), Fiscal Policy in India: Lessons and Priorities, in A Sustainable Fiscal Policy for India: An International Perspective, Peter Heller and M. Govinda Rao, ed., Oxford University Press, 393-439.

Sivaraman B. (1991), Bitter Sweet: Governance of India in Transition, New Delhi: Ashish Publishing House.

Srinivasan, T.N., (2008), Challenges Facing the Indian Economy, Working Paper.

Srinivasan, T.N., (2005), Comments on Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition,” IMF Staff Papers, 52 (2).

Srinivasan, T.N., (2004), Unfinished Reform Agendum: Fiscal Consolidation and Reforms, paper presented at Conference on India: An Emerging Giant, Columbia University, October 13-15.

Tiebout, Charles, (1956), “A Pure Theory of Local Expenditures,” Journal of Political Economy, October, 64, pp.416-24.

Twelfth Finance Commission (2004), Report of the Twelfth Finance Commission (2005-10), November, http://fincomindia.nic.in/Report of 12th Finance Commission/index.html

Wade, Robert, (1989) “Politics and Graft: Recruitment, Appointment, and Promotions to Public Office in India,” in Peter M. Ward, ed., Corruption, Development and Inequality, London: Routledge, pp.73-109

Wallack, Jessica (2003), Structural Breaks in Indian Macroeconomic Data, Economic and Political Weekly, October 11th, pp. 4312-4315.

Wallack, Jessica and T.N. Srinivasan (2005), Analyzing Federalism: Stylized Models and the Political Economy Reality, in T.N. Srinivasan and Jessica Wallack, eds., Federalism and Economic Reform: International Perspectives, Cambridge, UK: Cambridge University Press.

Weingast, Barry (2006), Second Generation Fiscal Federalism: Implications for Decentralized Democratic Governance and Economic Development, working paper, Hoover Institution, Stanford University.

Weingast, Barry, (1993), Constitutions as Governance Structures: The Political Foundations of Secure Markets, Journal of Institutional and Theoretical Economics, 149, 233-61.

Weingast, Barry R. and William J. Marshall, (1988) “The Industrial Organization of Congress,” Journal of Political Economy, Vol. 96, No. 1 (February), pp.132-63.

Wheare, Kenneth C. (1953) Federal Government, 3rd edition, London: Oxford University Press.

World Bank (2003), India: Sustaining Reform, Reducing Poverty, New Delhi: World Bank and Oxford University Press.

World Bank (2005), State Fiscal Reforms in India: Progress and Prospects (A World Bank Report), New Delhi: Macmillan India.