Institute for Social and Economic Change

Working Paper: 524

Fiscal Federalism: Transfer Dependency and Its Determinants Among Select Indian States

J S Darshini
K Gayithri



India is a federal country with asymmetric levels of development: Asymmetries that are both vertical and horizontal. This paper proceeds in two steps. First, it decomposes the level and pattern of fiscal dependency on the different components of total transfers. Second, it examines the factors that influence the allocation of conditional/discretionary central transfers to the states. The study finds that successive finance commissions have gradually enhanced the share of states in the centralised divisible pool over a period of time. It is evident from the overall empirical outcomes that states with a larger fiscal space and GSDP growth were able to get more funds relative to the political factors during the first and third sub-period. In all the three sub-periods, interactive dummies have remained significant in determining the allocation of federal funds to the states.

Working Papers