Expenditure Reassignment and Fiscal Decentralisation: An Empirical Study of State and Local Government in India

Abstract

Reassignment of local functions to state government and fiscal decentralisation seem to be contradictory. Whether these fiscal strategies are compatible policy packages is an empirical question. The crucial issue is as to how local governments respond to reassignment, a response which may be reflected in their willingness to spend on remaining functions. If reassignment stimulates local expenditure such that the extent of decline in fiscal decentralisation (the local share in total state–local expenditure) is less than the amount warranted, the two fiscal strategies can be taken to be compatible. To test this hypothesis, conditions for compatibility are postulated in terms of tax efforts of state and local governments. With use of Indian fiscal data, state and local tax efforts are computed and compared for selected states, as a first approximation. There is no conclusive evidence to show that reassignment has invariably exerted any dampening impact on local expenditure.