Institute for Social and Economic Change

Established in 1972 by Professor V K R V Rao, ISEC is an All-India Institute for Interdisciplinary Research and Training in the Social Sciences

Fiscal Decentralization in Indian Federalism – isec

Fiscal Decentralization in Indian Federalism


The paper analyzes fiscal decentralization in a three-tier federal framework in India. After a brief discussion on the evolution of Indian federalism and the description of the prevailing system, the paper brings out anomalies in assignments between centre and states and states and local bodies. Critical analysis of intergovernmental transfers brings out the efficiency and equity implications of their transfers.

The paper has some important findings. The inclusion of the third tier in the analysis brings out the true picture of fiscal deficits. Analysis shows that structural deficits in the country are due to fiscal mismanagement at both central and state levels. Despite the semblance of a hard budget constraint at the State level, the states have found ways to soften the constraints. Although the transfer system has equalizing impact, it has disincentives for fiscal management. Constitutional sanction has enabled the institution of local governments, but they do not play a major role in providing public services and much less in raising resources.

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