Federal Fiscal Relations in India-Issue of Horizontal Transfers

Issue of Horizontal Transfers J V M Sarma Devising optimal criteria for federal fiscal transfers to reduce fiscal imbalances across the states has always been a demanding job in India. In particular, two aspects that have become perennial sources of controversy are: the disintegrated componentwise approach, and the near-subjective assignment of weights to factors determining the horizontal shares of states. Given that the reduction of horizontal fiscal inequity is an important objective of the federal transfers, the study proposes a fiscal behavioural model to help identification of the criteria and derive weights for deciding the revenue shares, based on their observed degree of association with the fiscal balance of states. The approach is illustrated by estimating the model using panel data.