Question

Evidence show the fedrale country in India

Answer 1

There has been tremendous concern in policy circles that developing countries
that are rapidly decentralizing are exposed to the risk of macroeconomic instability due to
growing fiscal deficits and soft budget constraints at sub-national levels. While similar
concerns exist for developed countries as well, the risk is perceived as exacerbated for
developing countries because of lower potential revenue bases at local levels, higher
dependence on federal transfers, and poor quality of legal institutions. The concern gains
credence largely from individual case studies of sizable and persistent sub-national
deficits in federal countries like Argentina, Brazil, and India (Rodden, Eskeland, and
Litvack, 2001; The World Bank, 1999), and the theoretical and intuitive link between
fiscal deficits and decentralization.
This link lies in a political economy perspective of fiscal federalism in which the
geographical distribution of costs, benefits, and decision-making power over public
expenditures leads to a “common pool” problem akin to the classic theory of distributive
politics (Weingast, Shepsle, and Johnsen, 1981; Inman and Fitts, 1990; Aizenman, 1998).
If sub-national governments take spending decisions, and are financed by transfers from
the national government, which raises taxes, then the resulting amount of total
government spending will be inefficient, because local authorities do not fully internalize
the effects of their spending decisions on the consolidated government budget. Within
this framework, variations in political and institutional relations between the national and
different sub-national governments will have differential effects on the common pool
problem, and hence on individual sub-national fiscal policies (Jones, Sanguinetti, and
Tommasi, 2000). This paper estimates the effect of political and institutional relations
between the national and state governments in India on state fiscal deficits to examine
whether the logic of the common pool problem holds, or whether an alternate model of
political relations in a federation is needed to explain any impact on state deficits.
Jones, Sanguinetti, and Tommasi (2000) develop two hypotheses based on the
common pool game for the impact of federal-provincial relations on spending by
provincial governments in Argentina—one, provinces with higher federal transfers will
have higher spending; and two, provinces where the governor is from the same party as
the President will have lower spending.