Indian fiscal federalism : political economy and issues for reform

The institutional structure, within which tax, transfer, and public spending programs are designed and implemented, can be an important tool for, or major impediment to, economic reform and development. Therefore, understanding how the fiscal federal structure works in India and the constraints given by its political economy are important inputs for analyzing the likely effects of reform. This paper begins by developing a model of fiscal federalism in the Indian case that allows for self-interested government decisions, political pressure, and imperfect instruments of control. It is shown that costly influence activities may depend on the federal fiscal structure currently in place in India. The particular contribution of this model is to propose a systematic framework for analyzing the interactions between the institutions of fiscal federalism and political decisionmaking that can allow strategic behavior on the part of self-interested government decision makers to be explored. (Author abstract, modified)