VERTICAL FISCAL IMBALANCES IN INDIA: CONCEPT AND MEASUREMENT

Abstract

India is a federation whose roots can be found in the colonial period. Indian federal setup is clearly divided between centre, state and local government and likewise, the sources of revenue and responsibilities are also divided between them. The decentralization process in India is asymmetrical in the sense that decentralization of expenditure has been much more than the revenue decentralization as provided by the Constitution, thereby creating an imbalance in states’ income and spending. When this mismatch between the two is measured at different levels of government, we call it Vertical Fiscal Imbalance. In this paper, I have presented various definitions and measures of VFI given by several economists over the years and tried to measure the extent of VFI that exist in India since 1990-91 to 2014-15. We have used twenty five years data to make an analysis based on the data available in Finance Commission reports and Indian Public Finance Statistics. Our results show that the amount of revenue that has been decentralized over the period of study falls much short of the expenditure requirements that are expected to be met by the state governments. The situation is so intense that the state governments are left with no option other than relying on central transfers for financing their needs and that where the central government enjoys an upper hand and an authoritative power over the internal matters of the states. KEYWORDS: Expenditure, Decentralization, Indian federation, Revenue, Vertical Fiscal Imbalance.