Do Indian States have the Power to Devise their Own Policies? A Study on Fiscal Space

With the decentralization process of the 1990s, linked to economic liberalization, there emerged new decisional scope for regional governments to shape their own policies. But the decentralization process remains partial: the macro-economic policies as well as most of the taxing powers continue to be of the responsibility of the Central Government. The delinking of taxing powers and spending decisions has led to important fiscal imbalances in a context of greater competition among the states, each striving to increase its own financial capacities, by attracting private investments for instance. With these constraints, have the states managed to increase their fiscal capacities to customize their own policies? If so, do we observe any variations in the sectoral priorities of the states in the post-reform period? Using data on states’ revenue and expenditure compiled by the Reserve Bank of India for the period 1993 – 2003 this paper provides elements to answer these questions. [CSH, Working Paper 2013]