| dc.description.abstract | Regional imbalances in economic growth and development have always drawn
attention of the policymakers in federal economies. Two important economic forces
having implications for regional disparities are: i) market forces through interregional
trade and factor flows; and ii) direct interventions through interregional fiscal transfers
and channelling of investment to the poorer regions. Although impact of these forces on
regional disparities has been debated in the literature; there is a broad consensus to
reduce horizontal fiscal imbalances through intergovernmental transfers, to even enable
functioning of common national market.
A major handicap in conducting research work and policy formulation on regional
disparities in India is the absence of regional accounts, which could provide frame of
reference to analyze developments in the state economies. This data gap makes it
impossible to understand some of the important aspects of the state economies such as savings, capital formation, interregional trade, and capital flows. All these factors are
considered crucial in the economic growth theories. However, Indian policymakers have
been making their best efforts to achieve balanced regional development without having
data for the underlying regional accounts. Even the role of central government’s fiscal
policy, through its multiple channels of transfers and spending in the state economies,
has been rarely estimated comprehensively. Without measuring the size of central
government’s taxation and expenditure in the state economies, neither understanding of
horizontal fiscal equalization nor consolidated analysis of government transactions in the regional accounts is feasible.
This study attempts to fill two of the important research/data gaps in the work on
regional accounts and fiscal federalism in India by preparing estimates of: i) savings,
investment, and interregional capital flows; and ii) consolidated fiscal accounts of the
state and central government, within regional accounting framework. Estimates of
regional accounts cover the period from 1993-94 to 2009-10, while consolidated fiscal
accounts of the central and state governments have been prepared for 1999-00 to 2010-
11. To prepare the regional accounts at state level, we have used expenditure side
approach to the economic accounting at regional level. Interregional fiscal flows by
central government have been measured by analyzing interstate distribution of different
components of central transfers, expenditure by central ministries, and collection of
central taxes from the states. To this, state government’s budgetary transactions have
been added to prepare consolidated accounts of the government at state level.
Estimates of regional accounts show that changing growth trajectories of the
states in the last two decades can also be explained by savings and investment patterns at the state level. Particularly, some of the poorer states have increased their saving and investment rates in the last two decades, which is reflected in their improved growth performance. Analysis of regional accounts also shows significant interstate variations in the composition of state economies, particularly for the special category states which are dominated by government expenditure and interregional trade.
Analysis of interstate allocation of the central government’s transfers and
spending shows that formula based transfers, non-formula based transfers, and direct
central spending benefit three different categories of the states; with distributional
progressivity declining from formula based transfers to direct central spending. This
differing impact of the three channels of central transfers and spending raises questions
about the objectives of central government’s interventions in the state subjects. Although
central transfers and spending bypassing the state budgets partly cancel out the extent of horizontal fiscal equalization achieved through Finance Commission transfers, we still
found evidence for substantial horizontal fiscal equalization by consolidating central and
state budgets at the state level. We also found evidence of increasing interregional central transfers to the poorer states and sizable inflows of private capital to some of the poorest states. Evidence of large and consistent interstate capital flows substantiates the need to prepare estimates of GSDP with income accruing approach rather than existing income originating approach alone. This study develops a regional accounting framework which would be useful for planning and research on regional development. Regarding the structure of fiscal federalism in India, this study establishes the need and provides an approach to broaden the concept of horizontal fiscal equalization, which would be useful for managing centre-state fiscal relations. | en_US |
